January 22, 2008 / 10:07 AM / 12 years ago

Stock market rout fuels U.S. recession risk: Lehman

SINGAPORE (Reuters) - Tumbling stock markets increase the risk of recession in the United States, but such a significant downturn is still not a certainty, Lehman Brothers top global economist said on Tuesday.

An Indian broker reacts while trading at a stock brokerage firm in Mumbai, January 22, 2008. REUTERS/Arko Datta

Paul Sheard said the Federal Reserve and U.S. administration appear to working aggressively to support the economy, which could prevent recession.

Sheard, global chief economist at the Wall Street investment bank, sees a 40 percent chance that the world’s largest economy would go into a recession this year, but he said the risk was rising as stocks markets fell.

“It’s a worrying development that equity markets now are tumbling. (But) obviously we have to wait and see what happens over the course of the week,” he told Reuters.

“The equity market discounting a recession can actually be a self-fulfilling prophecy — a kind of shock through consumer confidence and wealth effects that could push the economy over the edge,” he said.

Billionaire investor George Soros told the Austrian daily Standard that the world was facing the worst financial crisis since World War Two and the United States was threatened with recession.

Stock markets in Asia and Europe tumbled on Tuesday, a day after global shares nosedived amid growing fears of a U.S. recession, sending investors to safe-haven government bonds.

Investors were carrying through from last week’s concern that a fiscal stimulus proposed by President George W. Bush would not be enough to prevent a sharp downturn in the U.S. economy.

“The Fed and the government should be implementing policies fairly aggressively to head off the risk of the economy slipping into a recession, and they are appearing to be doing that,” Sheard said.

The Fed has cut its fed funds rate by 1 percentage point to 4.25 percent since September last year and Sheard expects further cuts to total 150 basis points by August, including a half-point cut at the central bank’s policy meeting next week.

The European Central Bank (ECB) faced pressure to contain possible contagion from slower U.S. growth, which could prod it to cut interest rates at least twice this year, although for now inflation remained high.

“The challenge is probably more in Europe, where the central bank remains quite focused on inflation and the headline inflation is still quite high,” he said.

He suggested solid economic growth in China and India would fall short of being a cushion against a global slowdown, suggesting that Asian government should loosen fiscal policy to support their economies.

“The silver-lining is at the moment we are seeing the global imbalances unwind — so far it has been orderly, but there are signs that it could become a little more disorderly,” he said.

“The challenge for global policy makers is to continue to have a kind of soft-landing in term of this unwinding.”

Reporting by Kevin Yao; Editing by Neil Fullick

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