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Roubini: Sequester Could Mean Another Downgrade

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Dr. Doom doesn’t like the sequester.

Perma-pessimist Nouriel Roubini, who also happens to be an economist at NYU’s Stern School of Business, says that despite efforts to downplay the effects of the coming automatic spending cuts, the impact will be significant.

“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,” he told The Daily Ticker on Thursday.

If it continues too many months, Roubini said, “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.

In the latest game of political chicken between the Republicans and Democrats, Roubini said the advantage has shifted to Republicans.

“At the time of the fiscal cliff, all the bargaining power was with the Democrats because the automatic stuff was the tax increases,” he said. “This time the automatic stuff is the spending cuts,” which gives the Republicans the upper hand. He expects they will continue to try to force Democrats to accept entitlement reform.

Roubini also commented on Wednesday’s sharp market drop. As The Daily Ticker notes, it was the market’s worst day in three months, and the drop came after minutes from the last Fed meeting suggested the central bank could slow the asset purchases that have helped keep rates low and stock market prices high. Today, stocks are down roughly 0.5%.

Roubini said it was not only monetary stimulus by the Fed that has been driving stocks higher, but also “more unconventional monetary policy” from the ECB, Bank of Japan, Bank of England and the Swiss National Bank. That stimulus is aimed at boosting economic growth, and it may have helped, but the global economy is slowing.

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, Roubini added, according to the site. “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.”

The Ticker also reports Roubini is 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.

“We believe we will go into sequester,” he concluded, “so the fiscal drag could be something like closer to 2% of GDP,” which will be offset by some positive factors.