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US growth may slow sharply in Q4, early ’08: Citigroup

But it is expected to recover in 2nd half next year

(SINGAPORE) Economic growth in the US is likely to slow sharply in the fourth quarter and early next year, but is expected to recover in the second half of 2008, Citigroup’s chief economist said yesterday.

‘We don’t think the US is going to have a recession, but the risks of that have certainly gone up,’ said Lewis Alexander, who was in Singapore to speak to the banking group’s institutional clients in the region. He said he expects the US Federal Reserve to cut its main interest rate another full percentage point from the current 4.5 per cent to 3.5 per cent by the middle of next year.

He also warned that any move led by the US government to force banks and other lenders to delay the sale or repossession of homes whose owners default on their mortgage payments could worsen the US housing market downturn by reducing the amount of funds companies are willing to lend to new buyers.

US media reports last week suggested that the government there could be working with banks to extend the lowinterest rate period of ‘teaser rate’ mortgages, many of which are due to reset to higher interest rates next year.

Economists and policymakers fear that when the interest rates on such mortgages jump after the reset, many more homeowners will default on payments, triggering more home repossessions which would in turn reduce personal spending and drag the US economy into recession.

The impact of any sharp slowdown in US economic growth – let alone a full-blown recession – will definitely be felt in Asia, said Mr Alexander.

Although Asia’s economies have done well despite slower US economic growth in recent months, most of the drag on US growth has so far been focused on the residential construction sector – ‘one that doesn’t naturally generate a lot of spillover’, he said. ‘That’s why the rest of the world including Asia has done pretty well when the US

economy has been weak. If you have a more intense slowdown in the US, Asia would be vulnerable.’

Still, ‘the underlying fundamentals in Asia are pretty strong’, he said. But the recent spurt of growth in Asia has turned the spotlight on rising consumer price inflation driven by a combination of higher oil and food prices.

The expected interest rate cuts by the US Fed to avert an economic recession could place Asian economies with currencies closely linked to the US dollar in the difficult situation of trying to control price inflation – which requires higher interest rates or a stronger local currency – while keeping exchange rates stable by allowing interest rates to follow those in the US downwards, he said. ‘That does raise risks for economies like Singapore.’

The current turmoil in the financial markets will last at least till early next year, when banks and other major financial institutions report their full-year results, Mr Alexander said.

 

Source: Business Times 4 Dec 07

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