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Economists in Davos warn of U.S. recession spillover

Posted by ecoshift on January 24, 2008

Economists in Davos warn of U.S. recession spillover_English_Xinhua 2008-01-24

The U.S. economy, troubled by the financial turmoil, is all but certain to fall into recession, which could spill over to the whole world, economists warned at the World Economic Forum on Wednesday.

    DAVOS, Switzerland, Jan. 23 (Xinhua) — The U.S. economy, troubled by the financial turmoil, is all but certain to fall into recession, which could spill over to the whole world, economists warned at the World Economic Forum on Wednesday.

Nouriel Roubini, professor and chairman of Roubini Global Economics of the United States, told a six-person panel on the world economy in 2008 that the debate now was not whether the U.S. will fall into recession, but how severe it will be.

The warning came one day after the U.S. Federal Reserve suddenly slashed its interest rate by 75 basis points to 3.5 percent overnight, a move designed to help ease market nerves and salvage the world’s biggest economy from recession.

“The Fed cannot prevent the (U.S.) economy going into recession,” Roubini said, “My view is that world economy cannot decouple from a U.S. hard landing.”

Roubini predicted a deep and prolonged decline, perhaps lasting as long as a year.

“The point is not about a soft or hard landing, but how hard the hard landing is going to be,” he said, “I believe we are going to have a severe (U.S.) recession lasting for four quarters.”

A major downturn in the U.S. will inevitably result in a severe slowdown in economic growth in the rest of the world, Roubini said, while ruling out an outright recession on the global scale.

Stephen Roach, chairman of Morgan Stanley’s Asia division, said he stands “shoulder to shoulder” with Roubini’s pessimistic forecast.

“I think it’s going to be a fairly painful and relatively lengthy recessionary period,” he said, referring to the troubled U.S. economy.

Like Roubini, Roach predicted a prolonged global slowdown, not a recession, stressing a decoupling from the U.S. is only a fantasy.

Concerning Europe, another economic power severely hit by financial turmoil, Roach said it was not going to get special dispensation from a global economic slowdown, predicting the European Central Bank is likely to follow the step of the U.S. Federal Reserve to cut interest rate in the short term.

However, Roach criticized the U.S. Federal Reserve’s decision of interest rate cut as “reckless” and “dangerous.”

It “could create another (asset price) bubble-induced recovery” which was “the last thing the world and U.S. needs,” Roach said.

Roubini said the Fed’s recent easing, while necessary, comes too late to do more than make the recession “slightly more shallow and less protracted” than otherwise, due to the exhausted finances of U.S. consumers and a severely stressed banking system.

In contrast to Roubini and Roach, the Indian Commerce and Industry Minister Kamal Nath appeared more optimistic, arguing the growth of trade between developing countries could cushion the effect of a U.S. slowdown.

If the U.S. does slip into a recession, “this is the first time the world is looking at a recession with two engines of growth — China and India,” Nath said.

He said India’s growth, in particular, is largely being driven by domestic demand, making the emerging economy more resilient to any U.S. fallout.

As to China, the threat of a U.S. recession would pose a particularly difficult policy challenge, according to Yu Yongding, a member of the Chinese Academy of Social Sciences and a former member of the monetary policy committee at the People’s Bank of China.

“A serious slowdown in the U.S. economy will have quite a serious impact on the Chinese economy,” he said.

However, Yu said China’s growth could help it weather any slowdown.


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