US slowdown will be a blip, not a recession
Again the bank raised fears that the US property bubble could cause mayhem if it really took hold.
It’s a concern for all and in the Irish context that fear of a price bubble refuses to die down.
Prime Time’s exposé of crooked estate agents and highly questionable practices between lenders and sellers did nothing to calm the nerves of those who fear the market has also lost the run of itself.
It is important to point out that those who have been negative about the property market have been wrong in their analysis to date.
No sooner had the World Bank put its warning into the public domain than the outlook for the property sector in the US started to look up.
It may seem incredible, but mortgage applications rose 2% year-on-year in October, to achieve their highest annual rate of growth since October 2005.
Other key indicators, including one on manufacturing, have started to show some improvement. That is not to say the US will return to 3.5% growth next year.
What it seems to be telling the sceptics, who are waiting for the world’s biggest economy to slide into a long recession, is that they would be mistaken to write off the economy on the back of a slowdown in housing.
Many expected a long recession after the dotcom bubble burst in 2000.
The US did go into recession for two successive quarters but the biggest economy in the world then defied the expectations of many traditional economists by growing strongly despite the bubble bursting.
Their gloomy forecasts were relying on folk memory, for the most part correct, where previous economic booms were followed by equally long periods of negative to slow growth.
That’s the classic boom/ bust theory, but the markets failed to allow for Alan Greenspan, then chairman of the US Federal Reserve, who slashed interest rates in the US to 1% from 6% and kept the ship from sinking.
On the housing question some are suggesting that, at this point the slowdown may have peaked, and the economy will simply settle down to a more modest period of growth at least for the next 12 months, as the overall impact of the housing slowdown and higher energy costs impact on the level of economic output.
The better US figures of late suggest that those forecasting an early cut in rates from the Fed may have to wait a bit longer.
Inflation is ticking up and the odds are lengthening quite considerably on a cut in the first quarter of 2007.
The view now is that rates will hold at 5.25% until the second half of the year and this should help keep the dollar close to the $1.30 mark against the euro, barring unforeseen circumstances, such as a further oil shock.
However, there is no doubt that 2006 saw the stock of unsold houses in the US soar with some buildings hit with up to 20% of unsold properties on their books.
While this will lead to a slowdown in the US to about 2% it will not be enough to cause a slump, a point of view that was supported in a Bloomberg survey of 80 global economists after the publication of the World Bank global report on Wednesday.
However, it is also the case that productivity has slowed in the US and there seems little doubt that the next few years are pointing to a slower pace of growth.
Economists in the US suggest the rate will dip to 2.5% between 2007 and 2010, a full 1% behind that of the late 1990s.
But it will also mean no recession, and that is good news for us all.
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