US housing crisis reverberates around the globe
Updated: 2007-12-19 10:41
"The US is on the precipice of its first consumer recession since 1991, which was the last time the market suffered from a confluence of high energy prices, weakening employment conditions, real estate deflation and tightening credit," said David Rosenberg, Merrill Lynch's chief North American economist.
While debate is raging on whether the US economy will avert recession, another question is how much a US slowdown will affect the global economy.
Some experts say there has been a "decoupling," meaning the rest of the world is less dependent on the United States. But any slump in the US is still likely to have a global impact.
"We think 2008 will be the 'year of recoupling,'" says Peter Berezin, a Goldman Sachs global economist.
"The mortgage meltdown in the US has clearly affected global financial markets," he noted, adding that "the weakness in the US housing market is starting to raise concerns that the global housing market may suffer a similar fate."
Paul Sheard, economist at Lehman Brothers, is guarded, saying: "2008 is shaping up to be more challenging for the global economy than 2007 was. We expect growth to be lower."
The global economy will feel an impact of a US slowdown, even if the world's largest economy averts recession, Sheard said.
"If the US slows and other developed economies follow on, these economies will not be able to escape knock-on effects via the trade channel in particular but also via financial and confidence channels," Sheard said.
"We expect growth in Asia ex-Japan and in emerging markets to decelerate but given strong growth momentum, particularly in China and India, to maintain a healthy clip."
Experts are warning of a slowdown even though the US economy expanded at a robust 4.9 percent pace in the third quarter of 2007.
A Merrill Lynch report calls for "modest growth to take hold late in 2008" in the United States but predicts that the Federal Reserve will need to cut interest rates to 2.0 percent from the current 4.25 percent by mid-2009 to sustain the recovery.
Merrill Lynch said the impact will be muted as other regions become less dependent on the US for their exports.
"Imbalances in the global economy, stemming from historic dependence on the US consumer, have peaked and will unwind throughout the coming year," the Merrill report said.
Merrill predicts oil prices could spike further to near 100 dollars a barrel before demand weakens and prices fall below 70 dollars by the final quarter of the year.
It also expects the dollar to fall further against the euro and yen before starting to recover against major currencies but that "more heavily managed currencies, such as those in Asia, Middle East and Russia, will continue to appreciate."
In a more upbeat outlook, Societe Generale global economist Brian Hilliard in London says the worst may be over for the US and global economies, even if the hit from housing and credit was bigger than initially expected.
"We remain more optimistic about the ability of the world economy to withstand the shock from this liquidity event," he said.
"Our forecast for US growth of 2.6 percent in 2008 is higher than consensus. The Fed has signaled that is less keen to make further rate cuts because the real economy looks in relatively good shape but it is flexible."
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