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“Even this year, the consensus got it wrong, expecting a recovery to annual GDP growth of better than 3 percent,” the founder of Roubini Global Economics wrote.
“And
now, after getting the first half of 2012 wrong, many are repeating the
fairy tale that a combination of lower oil prices, rising auto sales,
recovering house prices, and a resurgence of U.S. manufacturing will
boost growth in the second half of the year and fuel above-potential
growth by 2013.”
Roubini
believes the U.S. economy will slow further this year and next as
expectations of the “fiscal cliff” keep spending and growth lower — and
uncertainty about the outcome of the presidential election dogs markets.
The fiscal cliff
could knock 4.5 percent off 2013 growth if all tax cuts and transfer
payments were allowed to expire and spending cuts where triggered,
according to Roubini.
“Of
course, the drag will be much smaller, as tax increases and spending
cuts will be much milder. But, even if the fiscal cliff turns out to be a
mild growth bump — a mere 0.5 percent of GDP — and annual growth at the
end of the year is just 1.5 percent, as seems likely, the fiscal drag
will suffice to slow the economy to stall speed: a growth rate of barely
1 percent,” he wrote.
The U.S. consumer,
which drives plenty of the global economy as well as the U.S., will not
be able to keep spending when $1.4 billion worth of tax cuts and
extended transfer payments come to an end according to Roubini.
“In
2013, as transfer payments are phased out, however gradually, and as
some tax cuts are allowed to expire, disposable income growth and
consumption growth will slow. The U.S. will then face not only the
direct effects of a fiscal drag, but also its indirect effect on private
spending,” he wrote.
The problems in the euro zone, a slowdown in China and
emerging markets, added to the chance that oil prices could be driven
higher by tensions over Iran’s nuclear program, will also add to
America’s economic woes, Roubini argued.
He warned the Fed
will not be able to ride to the rescue this time.
“The
U.S. Federal Reserve will carry out more quantitative easing this year,
but it will be ineffective: long-term interest rates are already very
low, and lowering them further would not boost spending,” he wrote.
“Indeed,
the credit channel is frozen and velocity has collapsed, with banks
hoarding increases in base money in the form of excess reserves.
Moreover, the dollar is unlikely to weaken as other countries also carry
out quantitative easing.”
Roubini
also argued that earnings growth is now beginning to run out of steam,
after buoying markets earlier in the economic cycle. The second-quarter earnings season has so far presented a mixed picture.
“A
significant equity-price correction could, in fact, be the force that
in 2013 tips the US economy into outright contraction. And if the U.S.
starts to sneeze again, the rest of the world — its immunity already
weakened by Europe’s malaise and emerging countries’ slowdown — will
catch pneumonia,” he warned.
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