Economy seen improving in second half of '08

NEW DELHI Thu Apr 24, 2008 10:55am EDT

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NEW DELHI (Reuters) - The U.S. economy could improve slightly in the second half of 2008 after a challenging first half, and there are some encouraging signs in the credit markets, a senior U.S. Treasury Department official said on Thursday.

Speaking in the Indian capital, David McCormick, Under Secretary for International Affairs, said the second half improvement would be due to a fiscal stimulus of $150 billion, which would help create 500,000 new jobs in 2008. "Hopefully it will be an important stimulant to the economy," he said.

The U.S. economy is facing a prolonged housing market downturn and credit and liquidity problems in the money markets, and high global oil prices are also taking their toll.

But McCormick said he was encouraged in recent weeks by a modest improvement in credit market liquidity.

"We are still at a very difficult time in the credit markets but we have seen some positive signs," he said.

The International Monetary Fund expects U.S. economic growth to slow to 0.5 percent in 2008 from 2.2 percent last year.

To counter the problems faced by the world's largest economy, the Federal Reserve has cut its benchmark interest rate by 300 basis points since September and is expected to cut the Fed funds rate further at its meeting next week.

It has also provided billion of dollars in liquid funds to near-frozen markets and stepped in to prevent the collapse of investment bank Bear Stearns.

Meanwhile, under a Federal Government fiscal stimulus program, 130 million Americans will receive tax rebates this year and in 2009.

"We think in the case of the U.S. economy we are going to have a very challenging first part of the year. We hope we will begin to see a slight improvement in the overall economy in the back half of 2008," McCormick said.

"We will begin to see a slight improvement in the back half of 2008 and obviously carry that momentum in 2009. But make no mistake, a very challenging time for the economy."

A Reuters poll this week showed analysts expect the U.S. economy nearly stalled in the first quarter and will shrink between now and June, but any recession was expected to be less severe than the last major downturn in the early 1990s.

For the year, economists saw the U.S. economy expanding by 1 percent and they predicted a rebound to 2.1 percent in 2009.


McCormick said write-downs stemming from the subprime crisis were estimated at $300 billion globally, of which half were by U.S. banks, and he expected there would be more write-downs around the world.

He said he had discussed high global oil and food prices with Indian policy makers.

Inflation in many emerging economies has shot up in recent months, driven by record high crude prices and a spike in food prices due to increased buying power of rapidly growing emerging economies, along with diversion of certain crops to biofuel and lower supplies.

He said high food prices were a significant problem, but it was an issue "which we are trying to address not only with food aid but by increasing exports of corn, soya bean and wheat."

(Writing by V. Ramakrishnan; Editing by Charlotte Cooper and Gerrard Raven)