Business | Economy
Recession clouds hover over US
At worst, credit pressures could tip the US economy into a recession, some observers fear, and spark a second phase of the credit crisis.
- Gulf News Report
- Published: 00:36 January 1, 2008
At worst, credit pressures could tip the US economy into a recession, some observers fear, and spark a second phase of the credit crisis.
For if growth slows sharply, that will spark corporate defaults, which, in turn will deliver a new wave of credit losses and almost certainly drag the equity market lower too.
However, most economists do not actually expect this apocalyptic scenario to play out. One reason is that the US still appears to be relatively resilient.
"US activity data — especially jobs and car sales — suggest a weakening in growth and not a recession," says Jan Loeys of JPMorgan.
Yet, some place the odds of a US recession in the first half of this year at 50/50, keeping equities in check in most developed markets.
Reuters polls show US and European economists reckon there is a 40 per cent chance of a US recession. They have also downgraded US, UK and euro zone growth prospects twinned with upgrades in inflation.
It seems to be a tough call.
"The growth outlook for the US has somewhat overshadowed some of the negative factors weighing on the dollar. Traders are beginning to look at looming Fed rate cuts as a mechanism of keeping the US economy out of recession," said Omer Esiner, forex analyst at Ruesch International in Washington.
Policymakers face difficult decisions on setting interest rates in the face of an emerging slowdown in economic activity in big economies, which is also being accompanied by evidence of rising inflationary pressures — key themes of recent data releases.
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