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Global Economy Hinges on Possible U.S. Recession

A deepening of the U.S. housing and mortgage crisis and a hard landing of the dollar could spark a recession this year and seriously impact the projected...

GENEVA — A deepening of the U.S. housing and mortgage crisis and a hard landing of the dollar could spark a recession this year and seriously impact the projected slowdown in world output and trade growth, according to two new economic reports.

This story first appeared in the January 15, 2008 issue of WWD.  Subscribe Today.

“A recession in the United States cannot be excluded in the year ahead, and economists are divided whether domestic-led growth in Asian markets can drive the global economy,” said a report by the World Economic Forum.

The WEF “Global Risks 2008” report, which draws on input from more than 100 top business leaders, concludes there are fears the current liquidity crunch will trigger a recession in the next 12 months. The report estimates the severity of the cost would be in excess of $1 trillion.

Similar warnings are flagged by the United Nations’ “World Economic Situation and Pros-pects 2008” report, which projects global economic growth to moderate to 3.4 percent this year, down from 3.7 percent posted last year. It forecasts world trade to expand by 7.1 percent, down from last year’s estimated 7.2 percent increase, and the dollar to depreciate another 5 percent.

The U.S. economy is projected to grow 2 percent, down from last year’s estimated 2.2 percent. The European Union economy is forecast to expand by 2.3 percent; China, by 10.1 percent, down from 11.4 percent last year, and India, by 8.2 percent.

However, the U.N. report cautions that, under its more pessimistic scenario, factors such as a deeper U.S. housing slump and an accelerated fall of the dollar by 20 percent could combine to “trigger a worldwide recession and disorderly adjustment of the global imbalances.”

The pessimistic scenario “is quite probable if a likely U.S. recession is stronger than expected,” said U.N. economists such as Heiner Flassbeck, a former top German economic policy maker.