US downturn to last 18-24 months - Stiglitz

21 January 2008 15:44  [Source: ICIS news]

Stiglitz: US will tackle the big issuesABU DHABI (ICIS news)--The US economy is heading for a downturn that is likely to stretch to 18-24 months and affect the global economy, said Professor Joseph Stiglitz, winner of the Nobel Prize for economics in 2001, on Monday.


“There is reason to believe that this downturn will be deeper and more prolonged than any downturn in a quarter century,” the senior economist said at the GCC 11th Industrialists’ Conference organised by the Gulf Organization for Industrial Consulting.


“It will be impossible for the effects not to be felt globally. But the impact would be limited as the world has become more diversified," he said.


China and India will be the engines of global growth in the future. But their economies are still small relative to the US which accounts for 25% of global GDP and cannot fully compensate for US weakness,” he added.


Stiglitz highlighted the the freezing of the credit markets and the subprime mortgage crisis, which were linked to the macro-economic problem of an impending recession, he said.


Stiglitz stressed that the subprime mortgage crisis would lead the US to confront bigger issues.


“The US is facing not only an economic problem but also a social problem. Nearly 2m Americans are expected to lose their homes in the next 12 months,” he said.


“Many will lose their entire life savings due to falling house prices. I therefore think it will be a serious downturn."


Stiglitz also said that the crisis would show up in other parts of the credit market such as consumer loans.


“There are no easy solutions. The underlying problem is that the US has seen zero or negative savings in the last few years. The economy was fuelled by unsustainable consumption for the past five years.


“If savings returns to a normal rate of 4-6%, it will create a drag on aggregate demand. This will be good in the long run but it will depress the economy in the short run,” he said.


The GCC 11th Industrialists’ Conference, held in Abu Dhabi, runs from 20-21 January.

By: Malini Hariharan
+65 6780 4359

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