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The prospect of a US recession is causing anxiety around the globe, including the BRIC economies, which are also battling steeply rising inflation. In a survey conducted in early 2008 by the US National Association for Business Economics, more than 45% of the 49 US-based economists surveyed believed the US was headed for a recession – double the number who foresaw a recession just three months earlier. Citing the biggest housing slump in 25 years, associated turmoil in financial markets and higher energy prices, the majority of those surveyed expected a “relatively muted” downturn, with growth of just 0.4% in the first quarter of 2008 and 1% in the second quarter, for calendar year growth of 1.8%. Those surveyed had become significantly more bearish since the prior survey in November 2007, when the prediction for 2008 calendar growth was 2.6%.
Recession – Or Just a Slowdown?
The US National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Fears of a US recession deepened in late March following the US Bureau of Economic Analysis’s announcement that real GDP growth suffered its steepest decline in four years in the fourth quarter of 2007, to just 0.6% (Figure 1). Domestic profits decreased 3.0% in 2007, in sharp contrast to a 12.3% increase in 2006.
The news followed the release of December unemployment figures, showing the US jobless rate jumped to a two-year high of 5%. David Rosenberg, Merrill Lynch’s chief North American economist, said that the data “strongly suggests that an official recession has arrived”.
“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 a slowdown, and we now have the jobless rate hitting 5% in December versus the [March 2007] trough of 4.4%,” Rosenberg noted, adding that figures on aggregate hours worked in the economy contracted at an annual rate of 0.4% in the fourth quarter of 2007, following a 0.6% decline in the third quarter. “Back-to-back declines in total hours worked have always been associated with recession,” he said.
“One can speak euphemistically, but there are no substitutes for outright ‘recessions’ – to say that the backdrop is ‘recession-like’ is akin to an obstetrician telling a woman that she is ‘sort of pregnant,’” Rosenberg writes. “You either are or you are not.”
Martin Feldstein, president of NBER denies the US is already in recession. However he did say he believes there is a serious risk of downturn, with the latest unemployment figures increasing the risk of recession by 50%.
Whether the US is in recession or not, noone denies there has been a significant slowdown in US economic growth brought on by a multitude of factors, the most prominent being the US housing slump and the associated sub-prime mortgage crisis, which by December 2007 saw borrowers defaulting on an estimated US$300 billion of mortgages. With US banks cutting back on the provision of credit to consumers and unemployment rising, US consumer spending increased by just 0.2% in December 2007.
The Potential Impact on the BRIC Economies of a US Recession
BRIC Exports Exports from the BRIC countries will be adversely impacted by a US slowdown or recession. However the degree to which each country is exposed varies considerably. Brazil and China will feel the effects most.
Nearly one-fifth of Brazil’s total exports in 2007 headed to the US and, as a result, it is predicting a slowdown of export growth from 16% in 2007, to 12% in 2008.
China’s Ministry of Commerce estimates 19% of its total exports were to the US in 2007, with exports accounting for 70% of China’s GDP. Citigroup estimates that a drop of 1% in US economic growth would shave 1.3% off China’s growth rate, due to lower exports. However, that’s not likely to make much of dent in China’s economy given its double-digit growth. Citigroup estimates China’s GDP growth will slow slightly to 11% in 2008, while Lehman Brothers is forecasting 9.8% growth.
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