Mon, Apr 13, 2009 - Page 11 News List

Ability of US to lead world out of recession uncertain

‘A BOXING MATCH’ If stock markets experienced a sudden setback, recovery could be delayed to late 2010 or even early 2011, an economist said last week

AFP , WASHINGTON

US President Barack Obama sees “glimmers of hope” of economic revival and Federal Reserve chief Ben Bernanke detects “green shoots” of recovery.

But amid the guarded optimism are concerns whether the US can lead the world out of recession.

As credit markets thaw, signs of life emerge in the moribund housing market, retail sales get a modest bounce and claims for jobless benefits stabilize, worries remain that the recession, now into its 16th month, will not give way to growth soon.

“Real GDP is falling rapidly, but we expect it to stabilize by about mid-2009,” said Ed McKelvey, a Goldman Sachs analyst, feeling the pulse of the world’s largest economy, which contracted 6.3 percent in the fourth quarter last year.

“However, the timing of the bottom in real GDP is highly uncertain, and recovery, when it does begin, will be anemic,” he said.

Real GDP refers to the inflation-corrected value of all goods and services produced.

SURVEY

According to a survey by the Wall Street Journal released last week, private economists expect the US recession to end in September, though most say it would not be until the second half of next year that the economy recovers enough to bring down unemployment.

“The end of the decline isn’t the beginning of the recovery,” economist David Resler of Nomura Securities said.

“It’s like a boxing match. Even if you win the fight, it’s not going to feel as good when you get out of the ring as when you went in,” he said.

The economists surveyed forecast GDP to contract in the first and second quarters of this year by 5 percent and 1.8 percent respectively on a seasonally adjusted annualized rate. A modest return to growth is not expected until the third quarter.

More than a third of the 53 economists polled expect the jobless rate to peak in the first half of next year.

By this December, the economists on average expect the unemployment rate to hit 9.5 percent, up from 8.5 percent last month.

STARED DOWN

At their meeting three weeks ago, Bernanke and his policymakers stared down grim forecasts that were sharply lower than the outlook at their January meeting, according to minutes of the talks released last week.

They believe the economy will begin to grow again “slowly” next year instead of the second half of this year, as they had expected in January.

Even as the central bankers remain cautious, Wall Street shares are rising, kindling hopes that the worst is over.

The US stock rally entered its second month last week despite an anticipated seventh straight quarter of declining profits for companies in the January-March period and prospects of more companies going bankrupt.

“Equity prices are up sharply, but the debt market continues to indicate a high probability of default,” warned Simon Johnson, a professor at the Massachusetts Institute of Technology.

“In particular, the level and recent trajectory of credit default swap spreads suggest that, as the financial system as a whole stabilizes, market participants expect increasing odds of failure (and failed bailout attempts) for the very largest banks,” he said.

While government attempts to stabilize short-term credit markets had been somewhat successful, conditions in the short-term funding markets had tightened recently, said Joseph Brusuelas, director at Moody’s Economy.com.

“The Fed will have to remain vigilant in its pursuit of financial stability,” he said.

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