US doing pretty well despite weaker growth

June 6, 2008

US economy headed for weaker growth
By Chia Yan Min

KEY FACTOR: Consumers will determine the length and severity of a recession, says Mr McCormack.

THE United States is headed for a period of weaker economic growth and could go through a 'mild recession', a leading analyst has warned.

'Our expectation is that the US economy will enter a mild recession. The numbers have surprised us, as they indicate that growth is still relatively strong,' Mr James McCormack, the managing director of sovereign ratings at credit ratings agency Fitch Ratings, said at the 2008 Global Banking Conference held at the Fullerton Hotel.

'Whether or not the economy enters a technical recession is probably not that important. What is important is the economy will soon enter a period of weaker growth,' he added.

The length and severity of the recession would depend on how households and consumers respond.

He said that the worst of the sub-prime mortgage crisis was over, but that the wider economic implications of the crisis had yet to be fully felt.

Household debt is mounting and, coupled with the country's low savings rate, could create a volatile situation ripe for a recession, Mr McCormack said.

'Savings rates are at a record low, and debt service ratios at a record high. An adjustment on the part of US households is required. How long that takes and how big that adjustment is will largely determine how weak the economy is.'

Private sector employment growth, a key indicator of economic health in the US, has turned negative this year, a defining characteristic of previous recessions.

Another conference speaker, the managing director of Fitch Ratings' financial institutions division, Mr Krishnan Ramadurai, noted that while the sub-prime crisis has had a mild impact on European banks, further contagion effects from the US would depend on the extent of the US recession.