America may be over her worst recession in 60 years

Author: By Sean O’Grady, Economics Editor

United States GDP contracted at an annualised rate of 1 per cent between April and June, compared with the same period in 2008. That was significantly better than the consensus expectation of a 1.5 per cent annualised fall. However, the US Bureau of Economic Analysis also downgraded its earlier estimates for growth, with a 6.4 per cent annualised decline now given as the reading for the first quarter of this year, even worse than feared.

The cumulative drop in output since the peak last year is now 3.7 per cent over four quarters ? the longest and deepest drop in output the world’s largest economy has experienced since the Second World War.

Bart van Ark, the Conference Board’s chief economist, said: “The path to recovery remains a long haul, with more disappointments likely in the months to come. The contraction ? though less severe than most forecasts ? offers no sign of a V-shaped recovery.”

Much of the continuing decline derives from 20 per cent shrinkage in business investment, including inventories and stocks. This “destocking effect” has been one of the most powerful deflationary influences in the recession. Analysts expressed the hope that the very speed of the correction now going on leaves room for a significant bounce in the third quarter’s figures when they are published later this year.

Even so, markets took the results in their stride, as they also showed that consumption is proving stubbornly weak. The restriction of credit as banks trim lending is likely to prove a long-term drag on the ability of the US economy to stage a vigorous recovery, though signs of life in the real-estate market may now boost confidence and cut the banks’ bad debts.

Economists also pointed to the early positive effects of the Obama administration’s $787m (£471m) stimulus programme, though the various spending schemes will have a bigger impact in the second half of this year and in 2010.

Ben Bernanke, chairman of the Federal Reserve, believes the recession will end this year. Some analysts think the economy will grow again ? at perhaps a 1.5 per cent annualised pace ? over the July to September period.

Arek Ohanissian, an economist at CEBR, commented: “Though there will be a bounce from the inventory and investment cycle in due course, it is not clear whether that will be enough for sustained growth. Export activity looks weak as the global slump continues.

“Though the government is doing its best in terms of its massive fiscal stimulus, the returns of which are now starting to show, it cannot go on forever, and will have repercussions in the longer term.”

That stimulus will help to push US government borrowing to 13.5 per cent of GDP this year and 9.7 per cent of national income in 2010, the IMF said yesterday, as it estimated global support to the banks at more than $10 trillion.

The board of the IMF stated that the sharp fall in US economic output “seems to be ending” but a recovery is likely to be slow and gradual: “As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending and confidence in financial stability has strengthened…

“Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside.”

The IMF said that the British Government’s borrowings will rise to 13.3 per cent of GDP next year.

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