Roubini: Perfect Storm or Not, 2013 Will Be Bumpy, Risky

Sunday, 18 Nov 2012 04:06 PM

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A so-called perfect storm of four economic events is threatening to pummel the global economy next year, but even if a worst-case scenario doesn't pan out, 2013 will be a bumpy year for the economy and financial markets, said New York University economist Nouriel Roubini.

Those four elements — stalling U.S. growth rates, Europe's debt crisis, cooling emerging markets, China namely, and military conflict in the Middle East — could combine into a superstorm and bruise the economy next year.

"The perfect storm is not my baseline scenario. My baseline scenario is one of low economic growth in advanced economies and recession in some of them—like the eurozone, like the U.K., like Japan—but not recession in the U.S., slower economic growth in emerging markets; that’s the baseline," Roubini told Bloomberg.

Under the worst-case scenario, the U.S. drives over its fiscal cliff next year and slides into a recession, the European debt crisis worsens and Greece defaults and exits the eurozone in a messy fashion while China experiences a hard landing.

Add to that, war breaks out between Iran and Israel and pushes gasoline prices up to $200 a barrel and the perfect storm strikes the economy.

"The probability that all of these four negative things occur in that extreme way at the same time next year is a low probability, but guess what? There will be a fiscal drag in the United States and economic growth will be slower with the eurozone crisis continuing," Roubini said.

"There is a slowdown of growth in China that is already undergoing and in the Middle East, even short of a military war between Israel and Iran, just the rise of a fear premium because of the risk of a war could increase oil prices to a level to make it negative for the global economy," Roubini added.

"So even if you do avoid the perfect storm the outlook for the economy and for financial markets next year will be a bumpy and a risky one."

In the U.S., tax cuts are due to expire at the end of this year right when cuts to government spending are scheduled to kick in.

The combination, known as a fiscal cliff, could send the country into recession next year if left unchecked by Congress.

Expect lawmakers to act, but a compromise could involve some tax increases or spending cuts that could slow growth in the U.S. in 2013.

"I think they are going to reach an agreement but even if they reach an agreement there will be some fiscal drag next year of about 1.5 percent of GDP so that means next year U.S. economic growth next year is going to be lower than this year."

The entire world is keeping an eye on Congress in hopes U.S. lawmakers steer the economy away from the cliff.

Unlike other elements of Roubini's perfect storm, the fiscal cliff is an avoidable tragedy, with political difference hampering progress.

Democrats champion extending Bush-era tax breaks to everyone but the wealthy as part of an effort to drum up government revenue to narrow deficits.

Republicans have criticized such proposals, claiming many small business owners would get hit by higher taxes and put off on expanding and hiring, which is what the economy really needs.

Even if lawmakers do strike a deal, long-term deficits and debt burdens must be addressed, experts warn.

"The fiscal cliff doesn't end the process; it's just the beginning. So we still have the threat of another credit downgrade hanging over our head," said Ward McCarthy, chief financial economist at Jefferies in New York, according to Reuters.

Others agreed.

"Without a legislative solution to the federal deficit and ever-rising federal debt problem, the U.S. runs the risk of another credit rating downgrade, with the added costs and uncertainty that could also weigh on economic growth prospects for years to come," Joe Carson, an economist at AllianceBernstein in New York, wrote in a note, Reuters added.

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