California seen struggle through this year-forecast

SAN FRANCISCO, March 25 Wed Mar 25, 2009 4:00am EDT

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SAN FRANCISCO, March 25 (Reuters) - California's economy, the world's eighth largest, will struggle through a worse than expected recession and will not begin to recover until next year, with normal growth resuming late in 2010, a UCLA Anderson Forecast report released on Wednesday said.

But even in recovery, the Golden State will suffer a high level of unemployment -- 10.5 percent in February, its highest level in nearly 26 years, the report said.

"The current forecast reflects a deeper and longer recession than we previously thought," the forecasting unit's report said.

"Overall our outlook for California is for a very weak first three quarters of 2009 and virtually no-growth in the fourth. The economy will begin to pick up in 2010 and by the end of 2010 will be growing at more normal levels."

The forecasting unit's view of California's economy in December had been "somewhat pessimistic." Since then it has turned considerably more pessimistic.

"What we did not realize was how fast things would deteriorate," the report said, adding that California's current slump could go down in the books as its worst downturn since the end of World War II.

California's economy has, along with the rest of the United States, been hurt by consumers reining in spending. Disarray in the financial sector also froze nonresidential construction while housing remains in a slump, said Jerry Nickelsburg, a senior economist with the unit.

Shrinking trade has also hurt California's economy, whose ports are major gateways for imports and exports crossing the Pacific Ocean.

"When U.S. consumption turns down, that's really amplified in California," Nickelsburg said.

KEYS TO RECOVERY

A rebound in trade is one of the keys to California's economic recovery along with renewed building and the return of shoppers to malls, according the UCLA Anderson report.

Until those activities improve, California's economy will stagger. "As the recession deepens, the diverse engines of California's economy find themselves running on fumes," the report said.

Federal stimulus money for public works will come too late to be of much help to California's jobs market this year and it may be held back in the future if the state government raises taxes, which may discourage companies from staying in or moving into the state, the report said.

California's jobs market will worsen, with the state averaging an 11.7 percent unemployment rate this year and high unemployment persisting after this recession's wave of layoffs ends because the state is not producing enough jobs for new entrants to its labor force, the report said.

Amid all the gloom, there are some bright spots in California's economy -- including its battered housing market.

Home prices in California remain under pressure because of foreclosures, but investors are snapping them up. Additionally, home builders are barely building so the state's housing inventory is shrinking. Both may help stabilize home prices, perhaps as soon as later this year, according to Nickelsburg.

(Editing by Bernard Orr)

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