The rally in global equity markets isn’t reflecting risks to economic growth from the European debt crisis and U.S. spending cuts, said Nouriel Roubini, the New York University professor famous for predicting the 2008 crisis.
Global stocks have gained more than $2 trillion since the start of 2013 as central banks move to stimulate economic growth. Risks including a deeper recession in Europe triggered by austerity measures and political turmoil as well as slower U.S. economic growth may return in the second half of the year, said Roubini, chairman of Roubini Global Economics LLC.
“Those risks are currently somehow under-priced by the market,” he said today in an interview. “They may be contained in the first half of the year, but they may re-emerge.”
European leaders are demanding that euro members press on with budget cuts to end the sovereign debt crisis as Italy edged closer to a new election after voting last week ended in deadlock. In the U.S., automatic spending cuts after Republicans and Democrats failed to reach an agreement on the budget may slow the expansion of the world’s biggest economy to 1.4 percent this year, Roubini said in Dubai. That’s below the 1.8 percent median estimate of 77 economists on Bloomberg.
Across-the-board spending cuts to U.S. defense and domestic programs, known as sequestration, took effect on March 1. Aides to President Barack Obama and Congressional leaders are signaling that the reductions could continue for months.
“Markets are underestimating how much the sequester and the gridlock in the United States could have negative effects on the economy and eventually on the market,” Roubini said.