“A BRICS currency makes no economic sense – zero.”

Raghuram G. Rajan, Professor of Finance at the Booth School at the University of Chicago and former Governor of the Reserve Bank of India, had a very firm idea of whether and to what extent the USA will fall into recession, suggesting that while there is a 55 percent chance of a hard landing and a 35 percent likelihood of a soft landing, there is only a 10 percent  probability of a deep and lasting recession. The probability of no recession at all clearly does not enter into the equation at all. What Rajan finds astonishing is how robust the US economy has remained until now. According to the professor, this is due to high levels of consumption by private households who are able to fall back on healthy savings and profit from the equity market’s strong performance in recent years. The labour market is also strong – everyone who wants work gets it – while companies are also highly profitable despite the rising cost of financing.

Yet Rajan sees risks nonetheless. Interest rates could rise still further, as the Fed has already hinted. A new oil price shock could accelerate a hard landing by the US economy. And then there’s the budget deficit. “Government spending is out of control,” warned Rajan, “and that worries me, because I can see that nobody seems concerned about this.” He added that this does not apply to the USA alone, as the interest burden of nations around the world rises, potentially limiting their options. Rajan is also seeing a trend towards deglobalisation, increased nationalism and protectionism. He calculated that while around 250 new trade restrictions were imposed in 2012, this number was ten times higher by 2022 at 2,500. The International Monetary Fund (IMF)’s global growth forecasts are constrained by this trend and have been steadily declining for years.

According to Rajan, China is likely to stop being the world’s growth engine in the future, as there are too many factors limiting the pace of this growth. “China’s growth was unsustainable,” said the Chicago-based economist, highlighting that the country has: too many bad investments, particularly in the construction sector; too little domestic consumption; too little productivity growth; significant structural problems in terms of both demographics and the labour market; and soaring public debt. Rajan then asked: “Where is China’s growth going to come from?” He also sees challenges for Asia’s other giant, India, which is growing at a rate of around six percent. Yet the country is focused solely on investing in its physical infrastructure – something Rajan believes is a mistake: “India needs to build up human capital. Providing healthcare, nutrition and education is much more important.” He believes that India’s economy can grow by as much as ten percent.

One of the final questions from the audience asked Rajan what he thinks of plans for a BRICS currency. His response was as unequivocal as his recession expectations at the start of his talk: “It’s a nice thing to talk about, but it makes zero economic sense.”