Thursday, April 10, 2008

RBC reports that U.S. economy should skirt recession and expect second half of 2008 to rebound!

This is what the RBC is saying about the US economy

U.S. economy skirting recession; expected to rebound by the second half of 2008

The U.S. economy is slowing sharply on the back of the sustained deterioration in both the housing and financial markets, with the latter raising the cost of borrowing for both households and businesses. As a result, we are projecting flat growth in the first quarter followed by a small decline in the second, thus implying an economy on the brink of a recession.

However, growth will be much stronger by the second half, with the gains concentrated in the third quarter as the government's fiscal stimulus package boosts consumer spending and sends overall GDP up an annualized 2.9%. The expansion will continue in the fourth quarter, albeit at a slower pace than in the third quarter, with the effects of earlier interest rate reductions contributing to a 1.2% rise in output.

We are projecting real growth of 1.2% for 2008 as a whole. The easing in credit conditions will allow for stronger growth in 2009, with the economy forecast to expand by 2.0%. In the near-term, the economy will remain in a slow patch, weighed down by the persistent deterioration in the housing market and attendant rise in mortgage defaults and delinquencies. The fallout from the financial market volatility will be that companies will write-down the value of mortgage-related debt and, in turn, reduce the amount of credit available for loans to households and businesses.

This reduction in credit availability will temper consumer and business spending activity. We forecast average annual growth under 1% for consumption in the first six months of the year, with business spending likely to contract mildly during the period.

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