U.S. recession on the horizon

The U.S. economy may fall into recession in 2008 as "inflation pressure'' drives up borrowing costs next year.

U.S. Federal Reserve policy makers have so far persuaded investors that they will contain inflation, helping keep yields on 10-year notes below 5 percent. U.S. consumer prices will increase more than expected, prompting a bond market selloff.

The view is darker than the predictions published yesterday by the IMF, which also expects a slowdown in the U.S. Inflation will persist because of rising prices in Asia, whose growth will fuel the global expansion next year.

Inflation is not going away at all, it's coming from land
prices in Asia, and hat's feeding into production costs."

The IMF yesterday said that inflation, oil prices and the risk of an abrupt drop in U.S. housing prices the strongest global expansion in three decades. The fund cut its prediction for U.S. growth next year to 2.9 percent from the 3.3 percent it forecast in April. That would be the weakest since 2003.
Morgan Stanley's New York-based chief economist, Stephen Roach, said that while he didn't share such type of view, the "odds of a U.S.-led global recession are rising in the 2007-08 period and cannot be taken lightly.'' David Rosenberg, chief North America economist at Merrill Lynch & Co., forecasts a 45 percent risk of a U.S. recession next year.
U.S. government 10-year bonds are yielding 4.77 percent and consumer prices rose 4.1 percent in July from a year earlier. The average rate on a 30-year fixed mortgage was 6.32 percent last week, close to the lowest since March.

Chinese Growth

Asia may be insulated from a U.S. recession at first, as China's high savings rate could fund continued investment in the world's fourth-largest economy.

If the U.S. stays down for several years then China will also slow down,
because in the end Chinese liquidity is based on exports."

The IMF forecasts the global economy will expand 5.1 percent this year, slowing to 4.9 percent in 2007. Both forecasts are 0.2 percentage points higher than its April estimates. Growth was 4.9 percent last year.
U.S. economic growth slowed to an annualized rate of 2.9 percent in the second quarter, after expanding 5.6 percent in the first quarter. China's economy advanced 11.3 percent in the quarter from a year earlier.