The world may be heading for its worst recession in a quarter of a century — if it’s lucky.
A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.
“It’s certainly going to be the worst since the 1980s,” says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the U.S. Treasury Department from 1993 to 1995. “The hope is that it won’t become the worst unemployment business cycle since the Great Depression.”
Of special concern: The two big bulwarks of the global economy in recent years — U.S. consumer spending and the rapid growth of emerging markets — may be finally giving way in the face of the 14-month-old financial turmoil.
That raises the odds that the coming economic decline will be long and deep, despite U.S. Treasury Secretary Henry Paulson’s $700 billion financial rescue plan, similar efforts by European leaders and the coordinated interest-rate cuts engineered by Federal Reserve Chairman Ben S. Bernanke and other central bankers last week.
“This is the worst crisis I’ve seen in my 50-year career,” William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. “We still have to deal with the effects on the real economy here and elsewhere.”
Household finances are also being pinched. The steep decline in U.S. stock prices last week alone wiped some $2.16 trillion from investors’ wealth. And banks are getting stingier with credit: Borrowing by U.S. consumers fell in August by the most on record as lenders shut access to loans, according to data from the Fed.
The consumer pullback is already sending ripples throughout the economy. Vacancies at U.S. neighborhood and community shopping centers rose to a 14-year-high in the third quarter, New York-based real-estate research firm Reis says.
A sharp reduction in household spending could turn what is shaping up to be the biggest recession since the early 1980s into something worse, Bruce Kasman, chief economist at JPMorgan Chase & Co. told a meeting of the Institute for International Finance in Washington yesterday.