October 16, 2008 / 3:30 PM / 9 years ago

Most of G7 in recession, more rate cuts ahead

5 Min Read

<p>From (L-R) Bank of Italy Governor Mario Draghi, IMF Managing Director Dominique Strauss-Kahn, Eurogroup Chairman Jean-Claude Juncker, Japan's Finance Minister Shoichi Nakagawa, U.S. Secretary of State Condoleezza Rice, U.S. Treasury Secretary Henry Paulson, France's Finance Minister Christine Lagarde, Canada's Finance Minister Jim Flaherty, Britain's Chancellor of the Exchequer Alister Darling and Italy's Economy Minister Giulio Tremonti listen to U.S. President George W. Bush speak in the Rose Garden after a meeting with G7 finance ministers and heads of international finance institutions at the White House in Washington, October 11, 2008.Jonathan Ernst</p>

LONDON (Reuters) - The world's richest nations are in or close to recession and further interest rate cuts are needed to stem off more rot from the worst financial crisis in nearly 80 years, Reuters polls of economists showed on Thursday.

Particularly worrying in a quarterly survey of about 250 analysts across the Group of Seven nations is the sharp deterioration in the outlook for the United States, which until very recently was seen only flirting with recession.

Now the consensus view is that the world's largest economy will shrink for three successive quarters, last seen in 1974-75. That, say economists, will require the Federal Reserve to cut rates even lower than their already rock-bottom 1.50 percent.

The polls were taken after governments across the G7 nationalized swathes of the ailing banking sector and after the world's major central banks slashed interest rates in unison in an unprecedented move that even involved China.

Central banks are still flooding money markets with billions of dollars in temporary cash and dropping restrictions on access to funds but banks remain very reluctant to lend to each other and market rates are coming down only gradually.

This leaves the world economy in its most dangerous spot in a very long time, say economists, who have all but abandoned concerns over inflation given the rapid falls in asset prices and a halving in crude oil prices in just a few months.

"With GDP in rapid decline, we look for recessionary conditions to produce a rapid rise in unemployment and worsening corporate profits," said Peter Kretzmer, U.S. economist at Bank of America in New York.

"The downturn is also being felt around the world."

The latest Reuters polls marked the largest downgrades to growth across the G7, with the exception of Japan, since June last year. Since the polls closed, U.S. and Asian stock markets staged their biggest falls since the crash of October 1987, but this time not on fears for the banking system.

Now financial markets and economists are fretting in unison about a global recession and the damage that would do to consumer and company balance sheets, setting the stage for higher unemployment and shrinking profits.

Inflation Fall a Bright Spot

Given the conclusion that recession is now probably gripping almost the entire developed world, it is tough to find positive news in the latest set of polls. Even the consensus that Canada will escape recession, although barely, is clearly at risk given its huge exposure to the U.S. economy.

With the exception of Japan, where growth and inflation are already weak as the country has only recently emerged from more than a decade of deflation, full-year growth expectations for 2009 have been chopped in half or even more compared with the most recent previous poll.

The consensus for Britain is outright contraction next year and four straight quarters of negative GDP, which started in the second quarter of this year. That has not happened since 1991-92.

"The silver lining is that with monetary policy able and hopefully willing to respond more aggressively than was the case back then, the recession will be shorter," said Andrew Brigden at Fathom Consulting in London.

"But much depends on how quickly the UK housing market stabilizes, and equally as importantly, on how quickly global credit markets reopen."

That could as easily be said for the United States as for economies on this side of the Atlantic given that there are no signs yet of the end to an historic property market rout.

The Bank of England and the European Central Bank have come under harsh criticism this year for not cutting rates swiftly and aggressively as the Federal Reserve started to do more than a year ago at the outset of the credit crunch.

But inflation targets that have restricted them from doing so seem no longer the constraint they were. The polls show inflation is set to fall below the BoE's 2.0 percent target by the end of next year -- far from the 5.2 percent it clocked last month.

Inflation will fall to the European Central Bank's 2.0 ceiling again by the first quarter of 2010, according to median forecasts, and the latest figure of 3.6 percent is on a clear downtrend.

But that comes at a heavy price, with the first recession since monetary union for the now 15-member bloc and a grim outlook for its three largest economies, Germany, France and Italy.

Inflation is coming down in the United States as well, with the 2009 U.S. CPI view downgraded for the first time since February.

Polling by Bangalore Polling Unit; Reporting by Wanfeng Zhou in New York, Tetsushi Kajimoto in Tokyo, Nigel Davies and Jonathan Cable in London, Cirsten Pahlke and Paul Carrel in Berlin, Brian Rohan in Paris, Viviana Venturi in Milan, Robin Pomeroy in Rome, Frank Pingue and Teresa Ruiz in Toronto; Editing by Ruth Pitchford

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