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Volatility in stock market shouldn't hurt China, US economy

By Nariman Benravesh (China Daily)
Updated: 2007-03-09 15:03

On the downside, housing is still stuck in a fairly deep recession, and a recovery is not expected until the end of the year. Prices have been falling by about 5 percent in the most overvalued markets.

While this is beginning to attract some buyers, the inventory of unsold homes is still around seven months, which is uncomfortably high for builders.

In the meantime, as prices slide, the sub-prime mortgage market is beginning to show signs of stress, with delinquency rates rising sharply and expected to go much higher.

So far, the impact on the conventional mortgage market and on risk spreads in bond markets has been very limited. However, markets are quite jittery and there has been a flight to quality, as evidenced by falling government bond yields.

More troubling is recent evidence of increasing risk aversion by the corporate sector. As a result, capital spending, which was supposed to be an engine of growth this year, is sputtering.

Similarly, because of the US housing recession and sluggish auto sales, the manufacturing sector is caught in the middle of a major inventory adjustment cycle. Weaker inventory accumulation accounted for half of the downward revision in fourth quarter US growth from 3.5 percent to 2.2 percent. Further efforts by US businesses to cut inventories are likely to keep growth weak in the first half of this year.

On a more positive note, consumer confidence and consumer spending seem to be holding up. This is largely thanks to steady jobs and income growth. In particular, despite the troubles in the manufacturing sectors of the economy, the service sectors are still doing pretty well.

Another source of strength for the US economy is exports, which have been growing at double-digit rates. Further weakness of the dollar, along with strong growth in other parts of the world, means that the US will enjoy export-led growth this year and probably for the next few years.

Global Insight predicts that US economic growth in the first half of this year will be between 2 percent and 2.5 percent. However, we expect growth in subsequent quarters to accelerate modestly, as the housing downturn eases. For the year as a whole, growth will likely be around 2.5 percent.

Despite Greenspan's comments, the risks of a recession are still quite low. While growth could weaken further, if the housing downturn gets worse or companies become more risk averse, it would take one or more big shocks to trigger a recession.

Global Insight assesses the probability of a US recession at 15 percent to 20 percent.

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