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Recession worries grow as credit flows slow

NEW YORK – CREDIT flowing to American companies is drying up at a pace not seen in decades, threatening the creation of new jobs and the expansion of businesses.

It also intensifies worries that the economy may be headed for a recession.

The combined value of two major sources of credit – outstanding commercial and industrial bank loans, and short-term loans known as commercial paper – peaked at about US$3.3 trillion (S$4.77 trillion) in August, according to data from the Federal Reserve. By mid-November, such credit was down to US$3 trillion, a drop of nearly 9 per cent.

Not once in the years since the Fed began tracking such numbers in 1973 have these arteries of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975.

‘This is a very big deal,’ said Mr Andrew Tilton, a senior economist in the US economic research group at Goldman Sachs. ‘You’re basically crimping the growth of the more vulnerable companies. If they can’t borrow the money, their options are much more limited. They’d have to have less ambitious hiring plans, buy less machinery and cancel projects.’

When credit to business slows significantly, a drop-off in investment by businesses has generally followed closely, he added, suggesting that the tightening increases the prospect of a recession.

Because it has the world’s largest economy, any recession in the United States would probably have a ripple effect across the globe because US consumers would be buying fewer goods from abroad.

Europe, so far at least, has not been subjected to a similar tightening of credit that would prompt a broader economic contraction, though available statistics provide an incomplete picture, analysts said.

Anecdotal evidence suggests that sectors depending heavily on the free flow of credit, notably construction, no longer have ready access to the cash that seemed plentiful just a year ago. Like in the US, big leveraged buyouts are now harder to finance.

But household borrowing in the 13 nations that use the euro has kept growing at about the same levels as before the onset of the credit crisis in August.

And bank lending to non-financial corporations has actually increased since August, according to the European Central Bank, a fact that reflects the peculiarities of this credit crisis.

 

Source: INTERNATIONAL HERALD TRIBUNE (The Straits Times 30 Nov 07)

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