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Old 01-10-2008, 06:55 AM
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Default UN fears world recession

UN fears world recession

January 10, 2008 07:40am

THE United Nations has warned of "clear and present dangers" that the United States will take the world economy to a near standstill this year.

As some of world finance's leading analysts predict a US recession this year, the world body says America's problems with housing credit and a weakening currency threaten to drag the world into an economic morass.

In an annual report, the world body forecast global economic growth at 3.4 per cent for 2008, only slightly lower than last year, but said it could be as little as 1.6 per cent.

The bursting of a housing bubble in the United States last year and a crisis over sub-prime mortgages had caused uncertainty across financial markets around the world, said the World Economic Situation and Prospects 2008.

Together with the decline of the dollar and imbalances between countries running surpluses, such as China, Japan and major oil producers, and those with big deficits, especially the United States, this could drag world production down, it said.

The US problems "could trigger a worldwide recession and a disorderly adjustment of global imbalances," the report said. "The recent global financial turmoil has heightened these risks and shown them to be clear and present dangers."

The last UN report issued a year ago proved overly pessimistic. It said 2007 world growth would drop to 3.2 per cent but it turned out to be an estimated 3.7 per cent, according to the new report.

The 170-page report, compiled by seven UN organisations, forecast US gross domestic product, or GDP, growth at 2.0 per cent this year compared with an estimated 2.2 per cent last year.

But it warned that could be virtually wiped out if US house prices fell by as much as 15 per cent. The economies of Japan and Western Europe, already operating near capacity production, could not take up the slack, it said.

Until now, trade has been increasing its share in most countries' GDP, but a US recession would cut back export growth from China, Japan and Europe, reducing their demand for exports from developing countries.

The recession camp got bigger today as Goldman Sachs became the latest Wall Street firm to join those arguing that an economic downturn is already here or will arrive soon.

"The recent data suggest that the US economy is falling into recession," Goldman Sachs economists said in a research note, noting that the impact of credit and housing woes is already being felt.

"We expect economic activity to contract modestly through late 2008, followed by a gradual recovery in the course of 2009."

The report came two days after Merrill Lynch said a recession was "a present-day reality" for the world's biggest economy.

Goldman Sachs said it expects the Federal Reserve to cut interest rates aggressively, bringing the federal funds rate from 4.25 per cent to 2.5 percent by late 2008.

The firm cut its 2008 growth forecast for the US to 0.8 per cent from 1.8 percent, and sees gross domestic product declining in the second and third quarters.

A recession is generally defined as two consecutive quarters of declining economic output.

On Monday, Merrill economist David Rosenberg said a report showing only 18,000 US jobs created in December - with a jump in unemployment to 5.0 per cent - means a recession is here.

"At no time in the past 60 years has the unemployment rate risen 60 basis points from the cycle low without the economy slipping into recession, and here we now have the jobless rate hitting 5.0 per cent in December versus the March 2007 trough of 4.4 per cent," Rosenberg said.

Recession "isn't even a forecast any more but is a present-day reality," and that is reflected in ultra-low bond yields and a near-bear market in stocks.


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