Davos forum mulls possible US recession

China is in a position to weather any slowdown because of its growth, and its position as a top emerging market.

kissinger 88  224 (photo credit: AP)
kissinger 88 224
(photo credit: AP)
DAVOS, Switzerland - With stock-market turmoil shaking outlooks worldwide, business leaders and economists at the elite World Economic Forum had mixed views Wednesday about whether a US recession could spread around the world - and what policymakers could do about it. "If there is a tremendous slowdown in the US economy, then we must be worried about it," said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, as concern grew over declining markets and their possible impact on broader US economy, a key market for many other countries. He said China was in a position to weather any slowdown because of its growth, and its position as a top emerging market that has expanded its trade with countries other than the United States. But Stephen Roach, chairman of investment bank Morgan Stanley in Asia, said US links to world markets were indisputable, and that could have ramifications for other nations. "The rest of the world is not as resilient," he said. Asked by a Mexican businessman if his country would be spared, Roach was blunt. "My good friend from Mexico, you're in trouble," Roach said. "Mexican exports to the US account for 25 percent of your GDP. Same number for Canada. How can the US go into recession and Mexico be fine?" Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the US economy sneezes, the rest of the world catches a cold, but said this time the diagnosis in the US was worse. "In this case the US is going to have a protracted case of pneumonia," he said. The doubtful mood hung over the event even after the US Federal Reserve Bank cut its benchmark refinancing rate to 3.5% from 4.25% in response to the global market meltdown. Investors feared the Fed cuts would not be enough to keep losses from securities based on mortgages to people with shaky credit from sinking the US into a recession. "The United States economy will correct itself," said David O'Reilly, chairman and CEO of Chevron Corp. "I'm an optimist when it comes to the length of what may be a slowdown or a mild recession.... The outlook is still pretty good." Economists also split along two lines over the role of central banks in bringing the world to the brink of recession, and whether institutions like the Fed were equipped to steer the global economy out of danger. The US Fed and the European Central Bank have taken different tacks, with the the Fed cutting rates quickly, while the ECB warns about inflation and indicates stock traders can't expect a cut soon - a stance some think it may have to abandon. John Snow, a former US Treasury secretary, said central banks have performed remarkably over the last two decades - better than any time in history, perhaps - and continue to make the necessary adjustments. "The issue of whether central banks are capable of vigorous action, bold action, was answered [Tuesday]," he said, referring to the Fed's interest rate cuts. "They can't see the world ahead perfectly, but who can?" But Joseph Stiglitz, the 2001 Nobel Prize winner for economics, disagreed. "What we have now are the foreseeable consequences of bad economic management," he said. Lawrence Summers, Treasury secretary under former US president Bill Clinton, also said central banks have lost their way. "I think it's hard to give central banks a very high grade over the last couple of years on recognition of... bubbles and the ability to address them," he said. "I think it's hard to give a high grade over the last six months when the bubbles have been bursting and [the banks] have been behind the grade." Others wondered why the European Central Bank, which has kept its benchmark rate unchanged at 4% since last summer, had not cut its rates, too. "Europe is not going to get special dispensation from a global economic slowdown," Roach said. The Forum, now in its 38th year, will touch on other issues affecting the world in 2008 and beyond, including stemming terrorism, pursuing a workable peace process in the Middle East and focusing on how technology is ushering in a new age of social networking that knows no borders. US Secretary of State Condoleezza Rice and Afghan President Hamid Karzai addressed the opening reception audience, which included Henry Kissinger and former British prime minister Tony Blair, among others. A year ago, Davos attendees predicted that the economy would move ahead with confidence. That's not the case this year, said Roubini. "It's not about a soft landing or a hard landing," he said, but "rather how hard a landing it will be."