The Obama administration’s latest economic proposals for infrastructure spending and tax relief for businesses won’t make a difference to the U.S. economy, said New York University Professor Nouriel Roubini.
“All three proposals -- the R&D tax credit, investment tax credit and infrastructure -- make reasonable economic sense,” Roubini told reporters before an evening speech hosted by the C.D. Howe Institute in Toronto. “However, the size of them is not large enough to make a difference for the economic outlook.”
President Barack Obama is proposing to expand tax relief for businesses and boost federal spending on transportation to help bolster the economy. In Milwaukee on Sept. 6, Obama called for $50 billion for a six-year program to fix roads and railways, and modernize the air-traffic-control system.
The U.S. will have a “fiscal drag” of 1.5 percent of gross domestic product into next year and even if Obama’s proposals are implemented, it would “lead to a slightly smaller fiscal drag” only, said Roubini.
Roubini, who forecast the U.S. recession more than a year before it began, also said Canada’s economy will perform “close to potential” into 2012, though a weaker U.S. economy will have an impact.
“Economic growth in Canada will be, at best, close to potential for the next year, year and a half, where potential probably now is closer only to 2 percent,” Roubini said. That growth could fall as low as 1.5 percent on a weaker-than-expected U.S. economy, he added.
Canada Can’t ‘Decouple’
Canada’s economy is stronger than the U.S., but isn’t able to “decouple” from its main trading partner, he said.
“For an economy that’s exporting about 70 percent of its exports to the United States and another 10 percent to the euro zone, the weakness in the United States implies that Canada cannot fully decouple from that economic weakness in the United States,” Roubini said.
U.S. economic weakness may prompt Canada’s central bank to pause on interest-rate increases. The Bank of Canada today raised its target rate for overnight loans between commercial banks to 1 percent from 0.75 percent, its third increase this year.
“The Bank of Canada is going to stay on hold,” Roubini said. “If there’s a material weakening of the Canadian growth because of the United States, then most likely than not they’re going to stay on hold for the time being.”
Roubini also reiterated his forecast last month that there is a 40 percent chance that the U.S. economy would slip back into recession.
“If the double dip does occur it could occur within the next 12 months,” he said.