Updates on US economy

Feb 25, 2008

Credit crisis could hit US economy hard: Lehman

WIDE SCOPE: The current recession in credit markets stands out for the broadness of its effects, says Mr Malvey.

THE credit crisis is likely to have a significant impact on the United States economy, in addition to the turmoil it is causing in the global financial system, a top Lehman Brothers analyst said recently.

The 'credit recession' has not been as volatile as some earlier downturns, such as the period after the terrorist attacks in September 2001, said Mr Jack Malvey, Lehman's chief global fixed-income strategist, last Friday. This crisis, however, stands out because of the 'broadness of its effects', he said.

It has created 'an enormous amount of balance sheet adjustment', as US and European banks make hefty write-downs to cover their exposure to risky sub-prime assets, said Mr Malvey.

He said the effects of the credit recession had widened. It has now also hit financial institutions like bond insurers and is likely to spill over into various sectors of the real economy, he added.

'Watch carefully in the second quarter of this year - as companies become more conservative and less keen to expand employment.'

However, he expects that the US economy, which he believes to be already in a recession, will have a 'technical recovery' by the end of the year.

This will be due partly to Washington's stimulus package, which will put cash in the hands of consumers, and to the effects of the Federal Reserve's rate cuts.

Still, the US will have to endure a 'slow healing process' next year before 'clear blue skies' emerge in 2010.

'We are definitely not looking at a V-shaped recovery, with gigantic upside in 2009,' said Mr Malvey.

He also noted that the equity markets were likely to make a recovery at the end of the year.

The average global returns on bonds, however, may fall to 4 per cent from 5 per cent last year - the best rate of return since 2004 - and slide further to between zero and 2 per cent next year.

In the aftermath of the credit recession, widespread changes in the global financial architecture are also likely, he said.