US recession story is a beat-up, say economists

Ethan Harris, chief US economist at Lehman Brothers, and Andrew Pease, investment strategist at Russell, down-played talk of a US recession yesterday, stating separately that 2008 could expect to finish in positive territory.

Harris said the press had “jumped the gun”, with headlines being given disproportionately to those who believed a recession was imminent, which in reality was only around a quarter of economists. “We believe that there will be a slowdown over an extended period, but the policy response has been quicker than usual and we expect the US Federal Reserve will continue to act aggressively – we think there will be a rate cut at every meeting until August,” he said. Harris also dismissed claims that 2008 would be a period of ‘stagflation’. “People assume that if we have economic slowdown with the current inflation and rising unemployment we will have stagflation, but the inflation of 2007 and the stagnation of 2008 will overlap only briefly,” he said. “A slowing of growth will ease the pressure on inflation.” Pease emphasised the low debt levels and strong profit margins in the American non-financial corporate sector, and said that the easing US dollar has strengthened export competitiveness, in addition to the 30 per cent of corporate profits earned offshore. The Fed’s 100 basis point cut in the US cash rate should make lending easier in the second half of 2008, Pease said, while slower economic growth should trigger further monetary easing in coming months. “Although US economic growth is almost certain to slow over first half of year, a recession seems unlikely.” The period of Australian sharemarket outperformance might be coming to an end, as the domestic market trades at an 8 per cent price:earnings ratio (P:E ratio) premium to global markets, far from its usual level of a 10-15 per cent P:E ratio discount to the developed world. However, local business confidence is near record highs and superannuation inflows are likely to boost equity market demand by approximately $30 billion during the year. Overall, Australian equities should provide high single-to-low double digit returns this year. “This would be a step-down from the heady outcomes of recent years, but quite respectable for the sixth year of a bull market,” Pease said.