Dr Doom warns of bubble trouble

Nouriel Roubini, the New York University professor who predicted the global financial crisis before markets peaked, says the Brazilian, Chinese and Indian economies may be overheating and developing asset bubbles.

The outlook for Brazil's economy was "very positive," though the debt crisis in the eurozone countries and a slow "u-shaped" recovery globally could dent its growth, Roubini said yesterday at an event in Sao Paulo.

"In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy," Roubini said.

"Expected and actual inflation is starting to rise, and that implies that over the next few quarters there has to be a tightening of monetary policy, gradually but progressively, in order to make sure that inflation expectations remain anchored."

Roubini, known as Dr Doom, recommended that Brazilian policymakers take steps to limit the appreciation of the real, including the "judicious" use of capital controls.

The currency has gained 8.2 per cent against the US dollar over the past 12 months, the best performer among currencies tracked by Bloomberg.

The stronger real had made the country's exports more expensive in US dollar terms, and the economy could also be hit by a fall in commodity prices, which were likely to decline over the next six to 12 months because of a possible double-dip recession in Europe and a US slowdown, Roubini said.

He predicted a bubble in US housing prices during an interview with Bloomberg News in October 2005, months before the market peaked, and said in August 2006 that he expected a painful recession.

In October 2008, he said he still saw "significant downside risks to equity markets".

The Standard & Poor's 500 Index fell by almost half over the next five months.

The eurozone economies were likely to stagnate this year, and Greece was growing closer to insolvency and might be forced to restructure its debt, Roubini said.

Euro-area ministers agreed on May 2 to provide €110 billion ($199 billion) of aid to Greece as the country struggled to control a deficit that reached 13.6 per cent of GDP last year, more than four times the EU limit.

When that failed to stop the euro's slide, the EU and International Monetary Fund offered a financial lifeline of almost US$1 trillion ($1.48 trillion) to member states.

Europe's currency has dropped 14 per cent against the US dollar this year, the biggest loss among its 16 most-active counterparts, according to data compiled by Bloomberg.

Chinese economic growth might slow to an annual rate of 7 per cent to 8 per cent by the end of the year or early next year, from 11.9 per cent in the first quarter of 2010, Roubini said.

US economic growth might slow to less than 2 per cent in the second half of the year, Roubini said. China's challenge was to boost domestic demand to sustain an economic expansion that has been based so far on investments and exports.

Brazil and India were in a better shape than China regarding strength of domestic demand, he said.

The professor, who is also chairman and co-founder of Roubini Global Economics in New York, failed to predict the market rebound that sent shares across the globe soaring last year.

The S&P 500 Index surged 80 per cent from a March 2009 low to a peak in April this year.

- BLOOMBERG