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Soft Patch Delusion Is Dashed: Roubini

Monday, 8 Aug 2011 | 5:11 AM ET

Influential economist Nouriel Roubini has warned hopes that the recent slowdown was temporary have been dashed and predicted the US and other advanced economies will have a second “severe recession ”.

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Writing in Monday’s Financial Times, the founder of Roubini Global Economics said: “America’s recent data have been lousy: there has been little job creation, weak growth and flat consumption and manufacturing production. Housing remains depressed. Consumer, business and investor confidence has been falling, and will now fall further.”

In the euro zone Roubini notes that peripheral economies are contracting, while the rest are hardly growing and the UK is flat.

“Even worse, leading indicators of global manufacturing are slowing sharply—both in the emerging economies like China, India and Brazil, and export-oriented or resource-rich countries such as Germany and Australia,” Roubini wrote.

“The misguided decision by Standard & Poor’s to downgrade the US at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits.”

“Hopes for quantitative easing will be constrained by inflation that is well above target levels across the West," he added. The Federal Reserve will probably start a third round of QE, but it will be too little too late.”

Roubini believes the best bet for those who can still borrow is to introduce new short term stimulus measures, whilst committing to medium term austerity.

“The US downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits.”

“Since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin," said Roubini.

"This means across-the-board reduction on the mortgage debt for the roughly half of America’s households that are underwater, and bail-ins for creditors of banks in distress.”

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