California won't resume growth till late 2010: forecast

SAN FRANCISCO Tue Jun 16, 2009 4:05am EDT

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SAN FRANCISCO (Reuters) - California's economy faces more hard times this year and will not grow until late next year, weighed down by the ongoing housing slump and the state government's need to slash spending, a UCLA Anderson Forecast report released on Tuesday said.

California, the country's most populous state with roughly 38 million people, also faces a double-digit unemployment rate persisting until 2011, the report said.

"California is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow," the report said.

A $24.3 billion budget gap faced by the state is sure to force deep spending cuts, which will limit the contribution of public spending to the state's economic recovery, the report said.

"California's state government, saddled with anachronistic revenue and spending processes, has no choice but to contract at the worst time," the report said.

California's current recession may be its worst since World War Two, and headwinds impeding a recovery include weak international trading partners.

The home of Silicon Valley and Hollywood, and often seen as a cultural trendsetter, California will be a follower not a leader in recovery from the country's current downturn, the report said.

HOUSING WOES NEAR END

Some relief in housing, however, is taking shape. "If there is any good news in the picture, it is that the correction in the housing market is complete and the overshooting which normally occurs after a correction has appeared," the report said.

"Our employment forecast suggests that it will be late in 2009 before prices are tempting enough and supply is low enough for the market to stabilize. When it does, the contraction in residential construction will, finally, after more than three years, cease to be a drag on the California economy," the report added.

But then the drag from state worker layoffs will emerge, and it will be "decidedly negative and will retard economic growth in 2010."

California's unemployment rate now stands at a near-record 11 percent, largely from slashed payrolls in home building and finance amid the mortgage crisis and foreclosure surge.

California's economy will begin to grow at more normal levels by the beginning of 2011, but not enough jobs will be created to push the unemployment rate below double digits until the end of 2011, the report predicted.

Potential risks to recovery include renewed turmoil in financial markets and a "longer term collapse in consumption," the report added.

It also listed political risks from state officials failing to craft a state budget in a timely manner and protectionism in international trade.

"While we don't anticipate any of these to occur, there is enough momentum in this recession and discussion in the policy sphere to make them possible," the report said.

(Editing by Leslie Adler)

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