Egypt Protests Negative for Growth: Nouriel Roubini
Web Producer, CNBC.com
Risks that the troubles in Egypt may spread to other parts of the world have increased and the uprisings have a negative effect on growth, as well as contributing to higher prices, economist Nouriel Roubini, chairman of Roubini Global Economics, said Monday.
Egyptian protesters were camped out in central Cairo Monday, demanding the departure of President Hosni Mubarak, who has ruled the country for 30 years.
"There's already political contagion from Tunisia to Egypt… geopolitical risk is on the rise," Roubini told CNBC in an interview. "It has a negative effect on growth or rising inflation. All this is not good."
But he added that the situation wasn't as serious yet as to lead to another recession.
"Even if in the past recessions have been associated with oil price shocks caused by geopolitical risk… we're not yet there but rising oil prices, risk aversion, these are all negative for the markets," Roubini said.
The protests could spread to countries such as India, Pakistan, China, even in Latin America where "a regime such as Chavez's may be challenged," he added.
"The price of food is rising around the world, the price of oil is rising, in many countries this is a shock to income," he added.
Austerity vs Stimulus
Europe and the US have taken different paths in dealing with the crisis, with Europe imposing tough austerity measures while the US kept stimulating its economy. This continuing disagreement is exemplified in how these regions evolved, according to Roubini.
"So far growth is already rising in the US … in the UK, even before the full austerity came into full force, there has been a contraction in the fourth quarter," he said.
The UK economy shrank by 0.5 percent between October and December 2011 and some analysts said Britain may be headed for a double-dip recession.
Austerity in the euro zone has led to "outright contraction" in the periphery countries or "barely any growth," he said.
"It may lead to a deflationary recession becoming entrenched in the periphery euro zone," Roubini said,
"At some point orderly restructuring of public and private debt will become necessary," he added.
In the US, economic growth is likely to be close to the potential, around 3 percent this year, but a higher rate of around 5 percent is needed for the economy to create more jobs, according to Roubini.
"This recovery has not been a V, it has been a U," he said.
States' Debt and Bond Vigilantes
The main headwinds facing the US are high unemployment, the double dip in housing prices, the high budget deficit and the dire situation of some states' finances, Roubini added.
"The path of least resistance in the US is to kick the can down the road and do nothing about the deficit," he said, adding that at some point the bond vigilantes – speculators driving down prices of government bonds based on fundamental weaknesses – are likely to attack the US.
"It may not happen very soon because you have low growth, low inflation, interest rates at zero, you have the Fed buying bonds," Roubini said, adding that a trigger for bond market vigilantes could be a fiscal crisis in states.
"The fiscal path in the US is clearly unsustainable … the US is doing less than anyone else to even start thinking about tackling it (the budget deficit)," he said.
But there is so much division now about what to do, with Democrats opposing spending cuts and Republicans against tax rises that "it's going to be up to the next president, whoever she or he might be, to decide what to do about the deficit," Roubini concluded.