Odds of new US recession greater than 50% – US Fed analysts

15 November 2011 18:14  [Source: ICIS news]

WASHINGTON (ICIS)--The odds of a new US recession in early 2012 are greater than 50%, economists at the Federal Reserve said in a report circulated on Tuesday, with the worsening European sovereign debt crisis most likely to trigger the new downturn.

The US central bank economists said in an analysis that the nation's domestic risks of an immediate recession appear to be low but are gradually increasing.

Risks posed to the US economy by foreign events are high in the near term, the economists said.

“The combination of these two recession coins … is quite disconcerting,” the analysts said in a paper issued by the Federal Reserve district bank in San Francisco, California.

The combined risks posed by the slow US domestic economic recovery and the persistent and worsening EU sovereign debt crisis “indicate that the odds are greater than 50% that we will experience a recession sometime early in 2012”, the report said.

“The fragile state of the US economy would not easily withstand turbulence coming across the Atlantic,” the paper said.

“A European sovereign debt default may well sink the US back into recession,” it added.

Two economists at the San Francisco Federal Reserve office were joined by an economist at the Federal Reserve district office in Kansas City, Missouri, in saying that “updated forecasts suggest that the probability of a US recession has remained elevated and may have increased over the past year, in part because of foreign financial and economic crises”.

They noted that the Organisation for Economic Co-operation and Development (OECD) has recently forecast that “growth prospects have significantly dimmed for major industrialised economies”.

“Growth in the G-7 countries is expected to remain below 1% for the rest of the year, while the odds of a contraction are 50-50,” they said. The G-7 nations include the US, Canada, France, German, Italy, the UK and Japan.

The three economists also cite a recent report by the International Monetary Fund (IMF) that “highlights risks the European sovereign debt crisis poses to the stability of the global financial system”.

That EU crisis, they added, “has resulted in escalating volatility in equity markets and the lowest interest rates on long-term US Treasury securities since the 1940s”.

Interest rates on US Treasury securities are so low because global investors are fleeing European countries’ government bonds, the endangered euro and other currencies and shifting to comparatively safer US Treasury instruments.

Because of burgeoning global demand for safe harbour investments, the US Treasury is able to sell its securities at very low rates. Conversely, the extremely low rates on long-term US Treasury securities are seen as a measure of growing global financial unease and a worsening economic outlook, especially in Europe.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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