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

The outlook for Brazil’s economy is “very positive,” though the debt crisis in the euro zone countries and a slow “u-shaped” recovery globally could dent the country’s growth, Roubini said today 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, 52, recommended that Brazilian policy makers take steps to limit the appreciation of the real, including the “judicious” use of capital controls. The currency has gained 8.2 percent against the dollar over the past 12 months, the best performer among 16 major currencies tracked by Bloomberg.

The stronger real has made the country’s exports more expensive in dollar terms, and the economy could also be hit by a fall in commodity prices, which are likely to decline over the next 6 months to 12 months because of a possible double-dip recession in Europe and a U.S. slowdown, Roubini said.

Housing Bubble

The euro zone economies are likely to stagnate this year, and Greece is growing closer to insolvency and may be forced to restructure its debt, Roubini added.

Euro-area ministers agreed on May 2 to provide 110 billion euros ($135 billion) of aid to Greece as the country struggled to control a deficit that reached 13.6 percent 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 $1 trillion to member states.

Europe’s currency has dropped 14 percent against the dollar this year, the biggest loss among its 16 most-active counterparts, according to data compiled by Bloomberg. It traded at $1.2308 as of 5:58 p.m. in New York.

Chinese Growth

Chinese economic growth may slow to an annual rate of 7 percent to 8 percent by the end of the year or early 2011, Roubini said today in Sao Paulo. U.S. economic growth may slow to less than 2 percent in the second half of the year, Roubini said.

China’s challenge is to boost domestic demand to sustain an economic expansion that has been based so far on investments and exports, he said.

Brazil and India are in a “better shape” than China regarding the strength of domestic demand, Roubini said. Emerging markets can grow between 5 percent and 8 percent during the global economic recovery compared to between 2 percent and 3 percent for rich nations, he said.

He didn’t provide further details about his growth outlook for India or China.

China’s economic growth accelerated to the fastest pace in almost three years in the first quarter, rising 11.9 percent from a year earlier. India’s GDP rose 8.6 percent in the three months ending March 31 from a year earlier, following a revised 6.5 percent gain in the previous quarter, the statistics office in New Dehli said today.

Brazil’s GDP may have expanded 8.5 percent on an annual basis in the first quarter, according the median estimate in a Bloomberg survey of five analysts. If maintained throughout the year, that would be the fastest growth rate in two decades. Brazil reports first quarter GDP on June 8.

The professor, who is also chairman and co-founder of Roubini Global Economics LLC 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 percent from a March 2009 low to a peak in April this year.

--Editors: Brendan Walsh, Rick Jarvie

at +55-21-2125-2535 or jgoodman19@bloomberg.net

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Matthew Bristow in Bogota at mbristow5@bloomberg.net

Sourced from www.businessweek.com