Roubini, the New York University professor dubbed “Dr. Doom” for predicting the 2008 financial crisis, highlighted five factors that could derail the global economy: a worsening of the debt crisis in Europe; tax increases and spending cuts in United Sates that may push the world’s biggest economy into recession; a hard landing for China’s economy; further slowing in emerging markets; and a military confrontation with Iran.
“Next year is the time when the can becomes too big to kick it down (the road)… then we have a global perfect storm,” Roubini said in a television interview with Reuters.
Roubini’s gloomy 2013 outlook isn’t new, but it’s getting more purchase as slowing economies and Europe’s debt crisis drive turbulence in financial markets.
After what he expects will be a flat year for US stocks in 2012, Roubini said the equity market could face a sharp correction next year, with little the Federal Reserve can do to stop it.
“There might be a weak rally because people are being cheered by more quantitative easing by (Chairman Ben) Bernanke and the Fed, but if the economy is weakening, that is going to put downward pressure on earnings growth,” said Roubini.
Roubini said the Federal Reserve may be pushed toward unconventional policy options as the stimulative effect of successive waves of quantitative easing – effectively printing money to buy government bonds – diminishes over time.
Unconventional policy could include “targeting the 10-year Treasury at one per cent, doing credit easing rather than quantitative easing, targeting nominal GDP, price-level targeting and lots of stuff that is more esoteric,” said Roubini. “Eventually if everything goes wrong, they can even buy equities.”