Tags: Roubini | Europe | market | tax

Roubini: Stock Market ‘Could Correct Somehow’

Friday, 08 Mar 2013 09:09 AM

By John Morgan

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The U.S. equity markets will face a shock in the second half of 2013, as the effects of tax increases and lower government spending conspire to harm the economy, according to Nouriel Roubini.

Roubini, the New York University economist noted for his pessimism and accurate prediction of the global financial meltdown, told CNBC there are some encouraging economic developments, such as a housing upturn and increased energy production, but they will be outweighed by the drags he sees.

The negatives go beyond the political damage done by lawmakers in Washington, Roubini said, maintaining there is no alternative to enforced austerity.

Video:
Economist Predicts 'Unthinkable' for 2013

“We’ve stolen growth from the future, and now there needs to be payback for the mistakes made in the past,” Roubini explained.

“These taxes, taxes for the rich are going to significantly reduce disposable income and retail sales have been a disaster. And there are already signals of consumption growth slowing down as well as the sequester.”

Therefore, “the fiscal drag this year will be 1.5 percent of GDP [gross domestic product] for an economy that was barely growing last year,” he said.

Roubini acknowledged the positive effects of the current rising stock market, but noted that equities might be making a false move.

“It’s positive because of the direct wealth effect and a signal that things might be improving,” he stated.

“Of course sometimes the stock market gives the wrong signal and I think the markets will be surprised by how much the U.S. will slow down even compared to last year and the second half of the year. The U.S. stock market could correct somehow.”

Roubini told Bloomberg TV that he sees ongoing problems in the European economy as well.

The Italian election results could spark the region’s debt crisis anew, and could undermine the European Central Bank (ECB)’s promise to protect the bonds of weaker countries in the eurozone, according to Roubini.

“The Italian elections are a game changer because until now the bargain was Italy and the periphery do austerity and reforms and then the ECB and Germans are going to be patient and provide liquidity,” Roubini told Bloomberg TV. “That political bargain is now unraveling so I see stormy weather ahead in the eurozone.”

Video: Economist Predicts 'Unthinkable' for 2013

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