World economy faces 30% risk of major crisis

The world economy faces a 30 per cent risk of stalling in the coming two years with asset values plunging, banks collapsing, and credit contracting still further.

Analysis from the Economist Intelligence Unit (EIU) points to the US economy facing a recession in 2008.

In the body's main risk scenario – with 30 per cent risk – EIU predicts: "The US economy fails to respond to policy stimulus and suffers a deep recession and a long period of sub-par growth comparable to Japan's 'lost decade'.

"This induces a stall in other developed economies, and, through a halt in world trade growth and a sharp correction in commodities prices, a severe slowdown in developing countries, including China and India."

However, there is a 60 per cent chance the US economy will fall into recession over 2008, but will rally back in 2009 – as interest rate and tax cuts take effect.

The EIU claims other developed economies will slow sharply, but avoid outright recession. Meanwhile world trade growth and commodities prices will stay high, and major emerging markets will suffer only a modest slowdown in activity.

Overall the EIU finds the US is vulnerable to some of the conditions that hit Japan in the late 1990s - such as the failure of conventional monetary and fiscal policy to stimulate economic recovery.

Also the US faces the worst slump in 50 years – with as many five million jobs being lost.

The study - Shooting the rapids: What happens if financial turmoil capsizes the global economy? - also comes up with a ten per cent chance of successful policy stimulus resulting in the US economy overheating and leading to high inflation.

Speaking earlier this week, Tom Elliott, global strategist at JPMorgan Asset Management, stated the full effects of the credit crunch are still around the corner.

He said: "We are not yet out of the woods.

"Despite strong gains over the last month for credit and major equity markets, we do not believe that we have entered a sustainable rally.

"The full economic impact of the credit crunch has yet to be felt in the G7 economies, as a rise in unemployment leads households to re-build their savings and to join the financial community in de-leveraging. This may lead to a downturn in consumer spending and bring still too-optimistic bottom-up profits forecasts down to the levels that are suggested by economic leading indicators."


Daniel Barnes