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Thursday, 16 October 2008

How deep will the recession be?

WASHINGTON - WITH recession fears for the US economy growing by the day in the wake of a global financial crisis, analysts are pondering the questions of how deep and how wide the downturn will be.
Most economists say the extraordinary efforts by Washington and other governments to stem the credit crisis appear to be helping confidence but will not prevent recession in the world's biggest economy.

Those fears were hammered home on Wednesday with unusually bleak reports on US retail sales, which represents the bulk of US economic activity, and a key regional manufacturing index.

Mr Carl Weinberg, chief economist at High Frequency Economics, said that even if credit flows are restored, the troubles are not over for the entire global economy.

'The world economy is still headed into a recession despite the global financial market rescue effort,' Mr Weinberg said.

'The decline will be deep and protracted. It has already started. Nowhere is the economic house in greater disorder than Euroland, although some may argue that Japan is a bigger mess.'

On Tuesday, San Francisco Federal Reserve president Janet Yellen became the first central bank official to acknowledge that a recession is probably underway in the United States.

Ms Yellen said she expected essentially no growth at all in the third quarter and 'an outright contraction' in the fourth quarter.

'Indeed, the US economy appears to be in a recession,' she said.

Reinforcing those fears, the Commerce Department reported that US retail sales - a key to economic activity - slumped 1.2 per cent in September, the sharpest drop since August 2005 and weaker than market expectations.

'People have dropped shopping. This happened even before the total meltdown in the stock markets. What is ominous is that the declines in spending were broad-based,' said Mr Joel Naroff at Naroff Economic Advisors.

Mr Naroff said it is only a matter of time before the recession becomes official.

'The real issue is how long this will last and how deep a slump will it be,' he said.

'The answer to that is not clear as it depends upon how fast the rescue plans that have been announced are actually implemented and work. That is likely to take time.'

Mr John Ryding at RDQ Economics said the latest reports show recessionary levels for both the consumer and manufacturing activity, an ominous sign for overall economic output and a sharp drop in gross domestic product (GDP).

Mr Ryding predicted a contraction of 0.5 per cent in the third quarter and a 2.5 per cent drop in the fourth quarter.

'Retail sales levels in September are unlikely to have captured the full impact of the intensification of the credit crisis and we look for further declines in the fourth quarter,' Mr Ryding said. 'We have a full-blooded consumer recession as sales in September fell across the board.'

Amid the grim backdrop, House of Representatives Speaker Nancy Pelosi said she would ask lawmakers to return after the November 4 election for a lame-duck session to consider a US$150 billion (S$222 billion) stimulus package, following a US$168 billion plan approved earlier this year.

'Congress must try again,' Mrs Pelosi said.

'I have asked the chairs of relevant committees to schedule hearings in the coming weeks on the key provisions of a fiscally responsible recovery package to get our economy moving again.'

The Fed's Beige Book said US economic activity weakened in September across the country with few bright spots and businesses 'more pessimistic' about the outlook.

The report, to be used by its policymakers for their October 28-29 meeting on interest rates, offered no surprise in its survey of the past few weeks during a period of heightened market turmoil and tight credit.

The report said activity 'weakened in September across all 12 Federal Reserve districts'.

Fed chairman Ben Bernanke said in a speech on Wednesday that a recovery from the financial crisis 'will not happen right away' but that the US economy will eventually emerge 'with renewed vigour'.

On Tuesday, US authorities unveiled plans to inject billions of dollars into banks to ease a global credit crisis in the first programme of its kind since the Great Depression.

The announcement provided a brief thaw in credit markets although it remained unclear how quickly it would jump-start interbank lending needed to fund corporate activity that fuels the economy.

Ms Sara Kline at Economy.com said there have been only modest declines in Libor - the interbank lending rates seen as crucial in the credit crisis.

These rates 'will need to fall further to have a significant impact,' Ms Kline said. 'The lack of confidence among financial institutions will weigh on the real economy through reduced credit availability to businesses and households.' -- AFP

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