Fears of US recession overblown: analyst

Business Times - 17 May 2008


Fears of US recession overblown: analyst

By OH BOON PING

(SINGAPORE) The Federal Reserve is likely to cut interest rates by another 25 basis points, before pausing to monitor the key economic data in US, according to the National Australia Bank.

However, its group chief economist Alan Oster felt that fears of a major US recession is overblown at present and forecast a US GDP growth of 1.2 per cent this year and 1.7 per cent next year.

Since last September, the Fed has slashed its key interest rate by 3.25 percentage points to 2 per cent.

Mr Oster was speaking to BT on the sidelines of a lunch forum organised by the CPA Australia.

On the issue of liquidity trap, Mr Oster said that: 'Where the Fed is at right now, either they do one more or sit around for a while to see what the data says. We actually think they are very close to the bottom.'

In his presentation, Mr Oster also said that a slowdown in US consumption is still to come in 2008, while recovery is expected in 2009.

These forecasts are based on assumptions such as flat equity markets, 1.5 per cent growth in real disposable income, and that oil prices peak at about US$120 before falling to US$90 by later this year.

In Asia, growth is expected to slow only moderately as there are 'enough dynamics' in emerging economies of China and India.

In China, he sees slower growth in exports of around 20 per cent, while 'retail also a touch lower - mainly in real terms given accelerating inflation'.

Overall, Chinese economic growth is expected to slow moderately to 9.5 per cent this year and about 8.9 per cent in 2009.

This year, India's gross domestic product (GDP) could grow by 7.5 per cent, but drop to 6.4 per cent next year.

He remains optimistic about the economic prospects in Singapore, as the city state largely 'reflects what is happening in Asia'.

This year's GDP growth in Singapore is forecast at 5.2 per cent, while next year's could hit 5.8 per cent.

Globally, GDP growth is estimated at 3.4 per cent and 3.2 per cent next year.

On the run-up in commodity prices, Mr Oster said that commodities are 'close to the top . . . And so our forecast is some of them are clearly going to go down, particularly the agricultural side. So the wheat and the rice prices are expected to come down.'

'I am not sure if iron or coal is going to come down, but if China slows, they will.'

The bank sees commodity prices falling 20 per cent from current levels in two to three years' time.

Separately, Morgan Stanley said in a note yesterday that trade trends in Singapore are likely to continue to soften, while cyclical segments will likely face further pressures.

This came after Singapore economy posted higher exports and non-oil domestic exports last month.

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