Research Roundup: Recession Risk Rises
Today’s Commerce Department report that the US economy virtually ground to a halt in the fourth quarter only increases the likelihood of an “official recession” this year. Gross domestic product growth slowed to a meager 0.6% from almost 5% the previous quarter, and was below expectations.
The International Monetary Fund has cut its estimated for US growth from the fourth quarter of 2007 to fourth quarter 2008 to 0.8%, down from 2.6% in 2006-2007, raising the likelihood of GDP dipping into negative territory for at least part of this year.
In its latest World Economic Outlook Update, the IMF says the overall balance of risks to the global growth outlook is still tilted to the downside.
“The main risk to the outlook for global growth is that the ongoing turmoil in financial markets would further reduce domestic demand in the advanced economies and create more significant spillovers into emerging market and developing economies. Growth in emerging market economies that are heavily dependent on capital inflows could be particularly affected, while the strong momentum of domestic demand in some emerging market economies provides upside potential,” the report says.
In a separate Global Financial Stability Report Market Update, the IMF said that deteriorating economic conditions could exacerbate pressures on major financial institutions that have already suffered big losses from the subprime crisis.
A possibly deeper economic downturn in the United States or elsewhere could also serve to widen the crisis beyond the subprime sector, as credit deteriorates more broadly.
Already delinquency rates in 2007 vintages of U.S. prime mortgages (those to the most credit worthy borrowers) are rising faster than in previous years, albeit from low levels, and other forms of consumer credit show signs of deterioration.
The CFOs of American companies seem to be expecting a recession. Their economic confidence plunged more than 10% since last quarter, moving to 19% below where it stood at this time last year, according to a recent survey conducted by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business.
In the 2007 fourth quarter “CFO Outlook Survey” the CFO Optimism Index for the US economy was 56.26, dropping significantly to fall even further past last quarter’s three-year low of 62.85.
This quarter, nearly 100 percent of the CFOs are as concerned, or more, about recession than last quarter, while over 95 percent report being as concerned, or more, about inflation than they were last quarter.
Meanwhile, RGE Monitor has an interesting take on the topic. A recession is usually defined as two consecutive quarters of negative growth. In RGE’s view, “A different meaning is attached to the concept of global recession, in a world where China, Russia and India account for half of global growth and are growing at an annual rate of 11.2%, 7% and 8.5% respectively.”
A 2.5% rate of global growth qualifies as a global recession.
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