More QE won't boost U.S. growth, economist Rosenberg says

NEW YORK Thu Dec 13, 2012 8:07pm EST

NEW YORK (Reuters) - U.S. economic growth will falter at the start of 2013 as fiscal stimulus from the Federal Reserve loses its bite and consumer spending weakens, Gluskin Sheff Chief Economist David Rosenberg told Reuters on Thursday.

Rosenberg, the former chief North American economist at Bank of America-Merrill Lynch who is known for traditionally bearish views, forecasts the world's largest economy will grow just 1 percent next year. He expects a particularly painful first half as businesses wait on the sidelines before growth picks up marginally in the second half.

"Much of the housing adjustment to the high side is now behind us," he said during a Reuters Global Markets Forum chat room interview. "A return to capital spending growth will be constrained even if we lock into a period of fiscal certainty because we are on the wrong side of the profits cycle."

Rosenberg, who joined Toronto-based wealth management firm Gluskin Sheff in the spring of 2009, believes increased marginal tax rates will dampen consumer spending if a deal over the "fiscal cliff" is not reached in Washington. Even then, a compromise including tax hikes would force households to set aside a greater portion of their paychecks for taxes. He also said the lingering European recession will weigh on exports.

In the third quarter, U.S. gross domestic product grew at an annualized pace of 2.7 percent, led by business restocking.

Rosenberg does not believe the nation's central bank will be able to pick up the slack and bolster markets as it did during the first two rounds of quantitative easing.

"I think the effectiveness of these QE's is beginning to wane. The Fed is not equipped to deal with structural debt issues," he said. "Operation Twist and QE3 are clearly not having any enduring impact unless you live in the world of the counterfactual."

The expiring "Operation Twist" program, which began in 2011, was the Fed's plan of selling short-term securities to buy longer-dated ones to help stimulate the economy by bringing down long-term interest rates.

Under the Fed's current strategy, which ties policy action to unemployment and core inflation goals of 6.5 percent and 2.5 percent, respectively, "we could be talking about 2018 for the end of financial repression," he said.

Rosenberg remains more bullish on the U.S. economy than the growth prospects of the euro zone and is advising clients to look at precious metals and mining stocks.

"I think the USA is still AAA - it has a printing press and gets its ink for free. It will not default in the classical case of the word. Reflate its way out is Bernanke's strategy."

The United States still holds top credit ratings by two of the three major ratings companies. Standard & Poor's cut the country's AAA rating to AA-plus in August 2011.

(Reporting by Eric Platt; additional reporting by Steven Norton; Editing by Walden Siew, Alden Bentley and Phil Berlowitz)

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