HONG KONG, April 20 (Reuters) - The surge in global equity markets in recent weeks is a false rally because more financial shocks are in store and the U.S. economy is weak, said an economist who predicted much of the current crises.
Nouriel Roubini, a professor at New York University's Stern School of Business and chairman of independent economic research firm RGE Monitor, said stock markets may not have reached bottom.
"I'm still cautious and bearish," he said. "I believe we are closer to a bottom in the stock market than a year ago but this is a bear-market rally."
The Dow Jones industrial average <.DJI> has surged 22.7 percent since early March, its strongest six-week run since 1938, as investors have started putting money back into equities on some tentative signs or a recovery.
But Roubini offered a note of caution following the rally on Wall Street and in world markets.
"I think the market is way ahead of real economic and financial data. I think people are deluding themselves," Roubini told reporters during a business lunch in Hong Kong on Monday. He said problems at U.S. financial institutions had not been fully revealed and forecast their losses would rise to US$3.6 trillion from US$1 trillion so far during the crisis.
"I see financial shocks in the months ahead. Some financial institutions are in so much trouble we may have to take them over," he told the audience.
He expects U.S. unemployment to top 11 percent in 2010, up from 8.5 percent in March, which will add to loan defaults. Half of hedge funds could go out of business in the next few years.
Non-financial companies' earnings will also disappoint in coming months and put pressure on financial markets, he said.
The rate of contraction in global economic activity had slowed in the past few months, but activity is still declining, he said.
He dismissed talk of "green shoots" of recovery in the United States, pointing out that retail sales, industrial production and housing starts all fell in March.
He does not expect growth in the U.S. economy until 2010 and even then it will be very low at 0.5 percent for the year.
"Recovery next year will be so weak, it will feel like a recession," he said.
China meanwhile will not meet its 8 percent growth target this year.
Roubini forecasts 5.5 percent growth for the Chinese economy, which effectively translates into a hard landing, he said. While fiscal stimulus would support the economy, which will perform better later in the year, it could also aggravate overcapacity in some industries, he said.
Once the global economy recovers, it will have deflation to contend with due to slack commodity markets and downward wage pressure as labour markets remain weak.
"For the next 2-3 years, I think deflation will be a problem," he said. (Reporting by Susan Fenton, editing by Neil Fullick) (susan.fenton@thomsonreuters.com; +852 2843 6367; Reuters Messaging: susan.fenton.thomsonreuters.com@reuters.net)