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GLOBAL RECESSION LOOMS IN NEW YEAR
Prosperity Under Attack on Four Fronts; Recession Probability 70%
Mount Kisco, NY, November 28, 2000
The probability of a recession beginning in the next 12 months is 70%, and it is likely to begin in the first half of 2001, according to the current issue of The Levy Institute Forecast and Macroeconomic Profits Analysis, published monthly by the Levy Institute Forecasting Center. Without lower interest rates and a powerfully rejuvenated stock market—or some other surprise—a downturn looms, the Forecasting Center warns.
“The great economic boom is crumbling...on four fronts: the production of and demand for goods and services, the stock market, credit quality and availability, and international economic and financial stability,” notes the Levy Institute Forecasting Center. As downward forces intensify, the question is not what will trigger a recession but what can stop the snowballing of recessionary process already under way.
According to the Forecasting Center, the three financial phenomena that were key to the historic economic boom—unrestrained debt creation, soaring stock prices, and abundant international liquidity—are disappearing. “In all cases, the party is ending and the hangover is just beginning.” The Forecasting Center points to recent concerns about credit problems and rapid tightening of lending standards. The economy has more debt relative to income than ever before, short-term interest rates are above postwar averages, and debt servicing burdens are extraordinarily heavy.
The economy is most likely headed toward a combination of severe recession, financial crisis, and international economic trauma. “The cyclical weakness already apparent in the United States, spreading debt problems, reversing wealth effects, and the slowdown in the international economy are mutually reinforcing and widely underestimated. Observers will continue to be surprised by the magnitude of unfolding troubles,” writes David A. Levy, director of the Levy Institute Forecasting Center.
The economists at the Levy Institute Forecasting Center expect the Federal Reserve to probably begin to cut interest rates in early 2001. If the economy falls into recession, cuts will total at least 200 basis points by year-end. “A recession, with the unusual and lingering financial troubles it would bring, would give Treasury bonds enormous appeal as a safe haven, as protection against deflation, and as a beneficiary of plunging short-term interest rates. Yields could fall to 3% over the next couple of years,” predicts The Levy Institute Forecast. |
