The US economy has a 75% chance of plunging into recession, the chief economist at ABN AMRO Bank warns.
Amsterdam-based Han de Jong says weakening consumer demand will be the decisive factor pushing the US into recession some time next year.
He believes a self-reinforcing “vicious spiral” is developing between the real economy and the financial markets; one unlikely to be stopped any time soon.
“For now, we are calling for a relatively mild US recession, provided that economic policy, in particular monetary policy, is eased significantly," de Jong says.
"However, the downside risks to this mild recession scenario are at least as large as the upside ones.”
De Jong notes the housing market continues to weaken and prices are declining nationwide. He says the reduced available of credit will weaken demand and thus push the economy into recession.
He says the Federal Reserve needs to “act swiftly and decisively”.
“We believe that the Fed will do exactly that, taking the fed funds rate from its current 4.25% to below 3% by the end of 2008,” de Jong says.
While world markets will feel the effect of a US recession, the rest of the world should escape without too much harm, especially the emerging markets.
“They are growing strongly and they have developed their own momentum,” de Jong says. “In complete contrast to the period of the Asian crisis in 1998, there is room for policies to stimulate the economy, should they be required.”
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