If US is in recession, others will follow

Washington: The US economy may already be in recession; other countries might not be far behind.

Japan, Britain, Spain and Singapore, which together represent about 12 per cent of the world economy, are vulnerable as fallout from the US worsens their economic weakness. Even emerging markets, including China, are likely to suffer as exports to the US wane.

The result: Global growth may decelerate close to the three per cent pace economists deem a worldwide recession, from a 4.7 per cent rate in 2007. "Some form" of global recession "is inevitable at some point," former Federal Reserve chairman Alan Greenspan said in a speech in Vancouver last week.

The developing slump puts pressure on central bankers in Japan, the UK and the euro region to follow the lead of Fed chairman Ben Bernanke, who last week accelerated interest-rate cuts in the US with an emergency move to lower the benchmark rate by three-quarters of a percentage point.

Policymakers may follow that with another cut of as much as half a point after a two-day meeting that starts today, futures trading indicates.

"The odds are shifting toward a more significant global monetary easing," says Richard Berner, co-head of global economics for Morgan Stanley in New York. Jim O'Neill, chief economist at Goldman Sachs Group in London, says growth in the first half of 2008 may be the "weakest since 2002 and maybe even 2001," during the last global downturn. "The economy is slowing everywhere," he says.

It's "highly likely" Japan is already in a recession or will enter one this quarter, Tetsufumi Yamakawa, chief Japan economist at Goldman in Tokyo, wrote in a report published yesterday.

A worldwide recession doesn't require a global contraction in output, which rarely happens; economists at the International Monetary Fund say it would take a slowdown in global growth to three per cent or less. By that measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.

The contagion from the US, which according to the IMF represents about 21 per cent of the global economy, is spreading via multiple channels. Less spending by American consumers and companies reduces demand for imported goods.

The meltdown of the US subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling US stock prices are dragging down markets elsewhere.

Collateral damage

"We'll see more collateral damage," says Allen Sinai, chief economist at Decision Economics in New York. "The risk of a global recession is rising."

Such a catastrophe, while increasingly possible, isn't yet probable, economists say. Sinai puts the odds at 20 per cent.

Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, reckons it's about 30 per cent.

The global implications of a US recession dominated discussions last week at the World Economic Forum in Davos, Switzerland.