Economy on brink of recession, Greenspan says

Former Federal Reserve chairman Alan Greenspan speaks at the Per Jacobsson Foundation Lecture in Washington October 21, 2007. REUTERS/Yuri Gripas

JOHANNESBURG (Reuters) - Former Federal Reserve Chairman Alan Greenspan warned on Tuesday the U.S. economy was on the brink of a recession, with the chances of that happening at more than 50 percent.

The U.S. economy has been hit by a credit crisis which began in the sub-prime mortgage market, prompting a series of interest rate cuts to help boost the economy. But price pressures are growing, making more rate cuts unlikely.

Asked if the U.S. economy was in recession, Greenspan said: “We are on the brink.”

A quick recovery was unlikely, he said via video link to a conference in Johannesburg. “A rebound at this stage is not something I think is in the immediate outlook,” he said.

“There are still very considerable structural problems remaining in the financial system. They will remain for a while. It’s going to be very difficult. There are a lot of unexpected adverse events out in front of us,” Greenspan said.

Greenspan said he did not believe arguments that the housing problems in the U.S. were due to interest rates being too low during his tenure. “As far as I’m concerned, the data do not support it (that argument). The housing bubble is clearly an international phenomenon.”

On South Africa, Greenspan said the country’s Reserve Bank had been right to raise interest rates in the face of accelerating inflation.

“The problem that you have here is that ... significant pressures are coming from oil and food, but they are none the less real,” he said. “The price increases are real and unless the central bank leans against them ... you will get a highly unstable inflation environment.”

South Africa’s central bank has raised its repo rate by 500 basis points to 12.0 percent since June 2006 to try tame inflationary pressures. But its targeted inflation gauge continues to accelerate, reaching 10.4 percent year-on-year in April.

Reporting by Stella Mapenzauswa, writing by Gordon Bell; editing by David Stamp