https://www.bloomberg.com/apps/news?pid= ... refer=home Jan. 28 (Bloomberg) -- The U.S. economy may already be in recession; other countries might not be far behind.
Japan, Britain, Spain and Singapore, which together represent about 12 percent of the world economy, are vulnerable as fallout from the U.S. worsens their economic weakness. Even emerging markets, including China, are likely to suffer as exports to the U.S. wane.
The result: Global growth may decelerate close to the 3 percent pace economists deem a worldwide recession, from a 4.7 percent 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 U.K. and the euro region to follow the lead of Fed Chairman Ben S. Bernanke, who last week accelerated interest- rate cuts in the U.S. with an emergency move to lower the benchmark rate by three-quarters of a percentage point. Policy makers may follow that with another cut of as much as half a point after a two-day meeting that starts tomorrow, 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.
Japanese Recession
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 today.
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 3 percent or less. By that measure, three periods since 1985 qualify: 1990-1993, 1998 and 2001-2002.
The contagion from the U.S., which according to the IMF represents about 21 percent 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 U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Tumbling U.S. stock prices are dragging down markets elsewhere.
``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.''
Catastrophe Improbable
Such a catastrophe, while increasingly possible, isn't yet probable, economists say. Sinai puts the odds at 20 percent. Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, reckons it's about 30 percent.
The global implications of a U.S. recession dominated discussions last week at the World Economic Forum in Davos, Switzerland. In Washington, the IMF postponed publication of its latest world economic forecast, originally due Jan. 25, to take into account recent market turbulence.
Japan's economy is particularly at risk. Its housing market is slumping as stricter building-permit rules drag home starts to a four-decade low.
A drop in construction demand led Tokyo Steel Manufacturing Co., the nation's biggest maker of steel girders, to lower its profit forecast Jan. 22.
Yen's Toll
``Japan is on the brink of a recession,'' says Hiroshi Shiraishi, an economist at Lehman Brothers Japan Ltd. in Tokyo. ``Exports are supporting the economy, but with the U.S. slowdown they're likely to lose momentum.''
The yen's 13 percent rise versus the dollar in the last six months is also taking a toll. The Japanese currency reached a 2 1/2-year high of 104.97 to the dollar last week and traded at 106.72 at 11:44 a.m. in Tokyo. That is near the break-even point for Japan's exporters, who say they can remain profitable as long as the currency is weaker than 106.6, according to a government survey.
Kozo Yamamoto, head of the ruling Liberal Democratic Party's monetary policy panel, urged the Bank of Japan to cut its benchmark interest rate, already the lowest in the industrialized world at 0.5 percent.
``Concerns over a recession are emerging not only in the U.S., but in Japan as well,'' Yamamoto said in a Jan. 23 interview. ``The BOJ should cut rates back to zero immediately.''
Credit Crunch
Singapore may already be in a recession. Its economy contracted for the first time in 4 1/2 years in the fourth quarter as factory output slowed and electronics exports dropped. The cooling local real estate market worsened the slowdown for financial services firms.
Housing is also slumping in the U.K., where loans for home purchases dropped to a two-year low last month. ``The credit crunch moved into its fourth month in December,'' Michael Coogan, director general of the Council of Mortgage Lenders in London, said Jan. 21. ``Lending volumes are likely to remain weak for the next few months.''
Retail sales fell in December by the most in 11 months. ScS Upholstery Plc, owner of 96 sofa stores in the U.K., said Jan. 14 that earnings will suffer after ``disappointing'' December and January business.
The U.K.'s biggest nightclub owner, Luminar Group Holdings Plc, said Jan. 18 that sales growth slowed as Britons spent less on nights out.
``It's a gloomy picture for the consumer,'' says James Knightley, an economist at ING Financial Markets in London. ``The prospect of recession is becoming more realistic.''
BOE Prediction
Retailers Tesco Plc and Marks & Spencer Plc this month called for interest-rate cuts to help consumers, who have 1.4 trillion pounds ($2.76 trillion) of debt. Economists surveyed by Bloomberg predict the Bank of England will lower its main rate a quarter percentage point, to 5.25 percent, on Feb. 7.
Spain is also grappling with a housing boom gone bust. Banco Bilbao Vizcaya Argentaria SA, Spain's No. 2 lender, predicts property prices will fall this year and building permits will drop 25 percent.
With more than 18 percent of gross domestic product coming from construction, Spain's economy is particularly susceptible to weakness in real estate.
``The main problem lies in construction but it has already spread to other sectors,'' says Gilles Moec, senior economist at Bank of America in London.
ECB's Inflation Fight
With other European countries, including Germany, showing signs of slowing, European Central Bank President Jean-Claude Trichet faces pressure to abandon his tough anti-inflation stance and cut interest rates. ``We'll see rate cuts in the European Union and in the U.K. this year,'' Barclays Plc President Bob Diamond said Jan. 24 in Davos.
Hopes that China's fast-growing economy can take up the slack from a U.S.-led slowdown seem misplaced.
``If there is weakness in the world economy, the impact on the Chinese economy will be very serious,'' says Yu Yongding, director of the Chinese Academy of Social Sciences and a former adviser to the central bank.
China's growth slowed to a year-over-year pace of 11.2 percent in the fourth quarter, from 11.5 percent and 11.9 percent in the third and second quarters, respectively.
In Davos, Klaus Kleinfeld, chief operating officer of Alcoa Inc., the world's third-largest aluminum producer, said he foresees ``a difficult year. I don't think the world can decouple itself from what's happening in the U.S.''
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28 Jan 2008, 04:10
