It's more than a soft patch, says Roubini

Published June 14, 2011

US economy is in a bind, made worse by gridlock between parties in Congress

By MINDY TAN AND JAMIE LEE

(SINGAPORE) Global economies are going through more than a 'soft patch', as problems with the US property market and the impasse over its budget deficit fuel pessimism, economist Nouriel Roubini said yesterday.

Mr Roubini: 'The Europeans are dealing with their own central government budget deficit, but the US is kicking the can down the road'
Prof Roubini, known for calling the fallout of the US housing market, said that about half of the households that have been mortgaged will have their mortgages under water in a year's time.

And when home values fall below the mortgage value, people will walk away from their debts, leaving banks stranded.

With demand declining but supply rising due to more foreclosures, today's US home prices are already 33 per cent below peak levels, said Prof Roubini. Although home prices had risen previously, this was artificially boosted by tax credits.

The US situation is exacerbated by the gridlock and lack of bipartisanship in Congress, as the Republicans and Democrats remain bitterly divided.

'The Europeans are dealing with their own central government budget deficit, but the US is kicking the can down the road,' said Prof Roubini. 'Nobody ever does anything serious about the deficit during election year. Whoever is going to be president in 2013 . . . he or she may start addressing (the budget) only in fiscal 2014.'

He also warned of the bond market vigilantes who are still 'in a coma'.

'(They are) going to wake up, and spike long interest rates and crowd out the recovery.'

Coupled with rising oil prices, a struggling labour market and painful fiscal adjustments that will slow economic growth, today's growth, while anaemic, is one that has already been 'stolen from the future'.

'If you look at the data on households, wage growth before taxes and transfers in the US is practically flat. What's been boosting disposable income has been tax reductions and transcript payments,' said Prof Roubini.

The US economy grew at a 1.8 per cent annual rate in Q1 - falling behind the consensus forecast - and was up 3.1 per cent in Q4 2010.

He added that if and when the government starts correcting the deficit through raised taxes, reduced transcript payments and government spending, there will be a 'double whammy', with fiscal drag and another round of real leveraging of households.

Prof Roubini also highlighted concerns about the emerging markets, noting problems of excessive credit growth and froth in asset prices, and that policymakers are not bumping up interest rates quickly enough to curb inflation.

'China is resisting excessive appreciation, and the rest in Asia and Latin America don't want to lose market share to China - 'if China doesn't want to move, I'm not going to move',' said Prof Roubini.

Warning of a hard landing in China after 2013, he pointed to China's over-reliance on fixed investment, which represents some 50 per cent of gross domestic product.

'No country in the world can be so productive. We'll need something of a miracle this time around, but I'm somehow sceptical.'

After it runs out of '10,000 miles of highways' to build, China would still have to turn back to domestic consumption as a means of creating growth - a 'structural change' that would take another 10 years to come about, he said.

But Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy, yesterday said separately at the Nomura Asia Equity Forum that Prof Roubini's take on China would be a 'tremendous wake-up call' for the Chinese policymakers.

'One reason why China will not have a hard landing is because Nouriel Roubini said there would be a hard landing,' he quipped.

'Given the quality of economic management in China, I think they will find solutions to this.'

He cautioned that in spite of the shift of power towards Asia, the US military needs to be present in the region to maintain geopolitical stability.

US Secretary of Defense Robert Gates had responded to Prof Mahbubani's question over a US military presence in this region at the Shangri-La Dialogue last week with a $100 bet that its presence would be strong five years from now.

'The day after the meeting, I wrote him to say I accept the bet, because I guarantee you that if there are budgetary pressures from the population of America, the first thing they are going to go after is the defence budget,' he said.