Monday, January 28, 2008

Global Recession Risk Grows as U.S. `Damage' Spreads

(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 Inc. 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.

Stocks Fall

Stocks retreated in Europe and Asia today, led by commodity producers and banks, on growing concern the global economy is slowing and companies may report more losses linked to subprime mortgages. U.S. index futures dropped and Treasury notes rose for a second day.

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.