Growth to Halt in Second Half, Payroll-Tax Cut Needed: Roubini

With stimulus programs no longer boosting the economy, growth will come to a standstill for the remainder of 2010 and feel like a return to recession, economist Nouriel Roubini told CNBC.

Nouriel Roubini
Photo: Oliver Quillia for CNBC
Nouriel Roubini

The head of Roubini Global Economics said a technical double-dip may not occur but that won't matter. The current consensus of meager gross domestic product growth won't even be matched, and that in itself will provide more trouble for the financial markets, he said.

""It will be a vicious circle because the economy is going to surprise to the downside," Roubini said. "The stock market is going to correct, credit spreads are going to widen. It will be a negative effect on consumption investment, the cost of capital is going to rise. And then you have another shock to the real economy, ending in a vicious cycle in which you can go off a cliff."

Roubini said third-quarter GDP is likely to be closer to 1.0 percent than the 2.5 percent that the consensus is predicting.

"That's already a growth recession," he said. "The second half of the year is going to be worse than the first because all of the tailwinds to growth become headwinds."

Roubini said a payroll tax cut, financed by a tax on wealthy individuals, would help generate growth and "subsidize the demand for labor."

That would reduce labor costs and drive spending far better than some of the other tax proposals from the Obama administration, he said.

The end of stimulus measures such as the Cash for Clunkers program and homebuyer tax credit, which acted as short-term boosts for the economy, will now act as drags, he said.

Economists say those types of programs usually just borrow demand from the future, providing short-term benefits but often detrimental in the long term. Both auto and home sales have tumbled since tax credits expired for the respective industries.