Slump in US economy unlikely – Global Insight

06 June 2008 03:42  [Source: ICIS news]

PALM DESERT, California (ICIS news)--The US economy is unlikely to head into a deep downturn but the recovery will be weak and prolonged, said the chief economist of consultancy Global Insight on Thursday.

“We don’t see a deep downturn in the US economy, but the recovery will be tepid,” said Nariman Behravesh, executive vice president and chief economist at Global Insight, at the American Chemistry Council (ACC) Annual Meeting.

Behravesh compared the current situation to the US recession in 2001, the mildest recession in the post-war period.

“Whether or not we are in a recession defined by the traditional metrics is irrelevant,” he said adding, “Housing and financial markets are in a recession, but export industries like the chemical industry are doing well. So is technology, oil and gas.”

The US economy will likely be “dead in the water” through the first half of 2008, bump up in the third quarter on the government tax rebates, but then could head into negative territory in the fourth quarter as those rebates “steal” growth from the fourth quarter, said Behravesh.

He sees the US economy growing at less than 1.5%/year in 2008 and 2009, with a “decent recovery” not starting until 2010.”

Growing inflation and the housing crisis will continue to weigh on the US economy, he said. The Consumer Price Index (CPI), the standard measure of inflation in the US, could rise to 6-8% some time in the summer, causing media headlines about stagflation, he added.

Stagflation is the combination of inflation and stagnant or declining economic growth, a common feature of US economy the 1970s and early 1980s.

“However, this time it will be stagflation-lite,” said Behravesh.

And emerging market economies are likely to continue growing at rapid rates of 6-8%, indeed “decoupling” from the US economy because of strong stimulus from macroeconomic policies, he said.

“There continues to be a lot of money spent on infrastructure and talent within the domestic emerging economies,” said Behravesh. “As to how long this growth will last, our best guess is until 2010.”

While the fast-growing emerging economies will likely decouple from the US economy, mature export-oriented countries such as Germany and Japan will not, he said.

“Germany does not export much to the US, but exports a lot of things like infrastructure to China, which uses them to produce goods for the US market,” he noted, adding “So if the US economy slows, that will impact Germany’s exports to China.”

By: Joseph Chang
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