Thursday, February 21, 2013

Dr. Doom: Don’t Underestimate the Economic and Financial Effects of the Sequester

Economist Nouriel Roubini of NYU’s Stern School of Business tells The Daily Ticker that In the fourth quarter, the major economies of the U.S., U.K, Japan and the Eurozone all contracted and they could slow even more because of spending cuts, says Roubini. “The core of the Eurozone has to do it, the U.S. has to do it…and when you have synchronized fiscal contraction the negative effects on economic growth are worse."

He’s forecasting 1.6% GDP growth in the U.S. this year, which would be the slowest pace in three years. On the positive side he sees growth in housing manufacturing and energy production, primarily the “shale gas revolution.” On the negative side: big government budget cuts.

Roubini says the market should not underestimate the impact of the sequester cuts. “It doesn’t look like there will be a last minute deal on the sequester ….the question will be how long the sequester will last.” If it continues to many months, says Roubini. “The fiscal drag will be another 0.7% or 0.8% of economy” which could lead to another shock in the financial markets and another rating agency downgrade….


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