I guess it's time I made some of my own predictions for the new year. The really big question this year (aside from the Presidential election) is what fate the US economy in the wake of the credit crunch, oil at $100 a barrel and collapsing house prices? Will the economy sink in 2008?
While there are too many unknowns about financial market or housing trajectories over coming months to completely rule out a recession, I doubt we will see it. My tip is a first half of very tepid economic growth, followed by a hesitant recovery in the second half as confidence kicks in again. Trade gains from a still cheap dollar and continued buoyancy in emerging markets will both help to prop up the economy through 2008.
To be sure, the downside risks are considerable and a Minsky-type financial crisis remains a possibility. What prevents me from forecasting more gloom is that central banks have demonstrated their preparedness to do whatever it takes to maintain stable financial market stability. For that we can probably thank Ben Bernake, who understands very well the lessons of the Great Depression.
Even the professional doomsayers at Morgan Stanley are hedging their bets, predicting a "mild" recession - an oxymoron if ever I read one. Meanwhile Krishna Guha from the Financial Times explained it succinctly on Monday:
The US will skate along the brink of recession in early 2008, but should avoid tipping over the brink, in part owing to continued strong exports to the rest of the world. Nonetheless, the economy will not bounce back quickly and will instead endure a protracted period of weak growth, during which time it will be vulnerable to any further economic shocks.
House prices will continue to fall nationwide, with big declines in California and Florida. However, the negative wealth effect on consumers will be partly offset by adequate earnings growth in a resilient jobs market. Unemployment will edge up, but not by much. The Federal Reserve may end up cutting interest rates by more than it thought it would, but its ability to do so will be constrained by inflation risk, especially if oil and food prices remain high or move higher.
Quite so. Larry Elliott provides a useful round-up of economist opinion in today's Guardian piece, Is this the big one? See also the lively commentary on my earlier post: Is the US heading into a recession?
Today's FT features a longer article by Krishna Guha, Danger ahead: The prospect of recession again confronts America, with a nice set of charts. Click on the thumbnails to see them full size.