Tue, May 20, 2008 - Page 10 News List

NABE forecasts weaker economy,


First the good news: The worst of the painful housing slump and the credit crunch might come to an end this year.

Now the bad: The US economy will weaken further and unemployment will rise.

That is the latest outlook from forecasters in a survey that was to be released yesterday by the National Association for Business Economics (NABE). It will take time for any rays of light to poke through the economic clouds, though.

A growing number of economists believe the US is on the brink of a recession or in one already, dragged down by all the problems in the housing, credit and financial markets. Now 56 percent of the economists think the economy has started or will enter a recession this year. That’s up from 45 percent in a survey in February. If there is a recession, it probably will be short and shallow, economists said.

Forecasters downgraded their projections for economic growth.

They now predict the economy, which grew by 2.2 percent last year, will slow to 1.4 percent this year. That’s lower than the 1.8 percent growth projected in February. If the new figure proves correct, it would mark the weakest growth since the last recession in 2001.

Next year, the economy should grow by 2.3 percent, less than previously forecast and a pace that is still considered subpar.

“Although housing and credit markets will gradually loosen their grip, US economic growth is expected to only slowly return to health,” said NABE president Ellen Hughes-Cromwick, the chief economist at Ford Motor Co.

Given the outlook for sluggish overall economic activity, companies are likely to remain cautious in their spending and hiring.

The unemployment rate, which averaged 4.6 percent last year, will move higher. Forecasters predict the jobless rate will hit 5.3 percent this year and 5.6 percent next year.

Forecasters are hopeful that the housing slump — in terms of home sales — will hit bottom this year. However, economists were divided over whether the low point would be reached in the second, third or fourth quarters of this year. House prices, though, are still expected to drop this year and next.

On the credit front, economists predict conditions will improve in the second half of this year.

“The economy is still going to be weak in the very near term, but the worst is likely to end this year with respect to the housing decline and the credit crunch,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group, who was involved in the NABE survey.

Fifty-two forecasters were polled between April 17 and May 1.

Weakness in housing was cited as the factor most responsible for the economy’s troubles. That was closely followed by credit problems and high energy, food and commodity prices.

With food prices marching upward, gasoline prices rising across the US and oil hitting a record high near US$128 a barrel, inflation should rise. Consumer prices will increase 3.6 percent this year, up from a previous forecast of a 3 percent rise. Next year, prices should calm down a bit, with the inflation rate clocking in at 2.4 percent.

To bolster the economy, the US Federal Reserve has been cutting a key interest rate since last September. However, when the Fed lowered rates to 2 percent last month, policymakers signaled that their rate-cutting campaign may be drawing to a close.

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