US interest rates will plunge from 4.5pc to 2pc as the American economy suffers its first consumer recession since 1991, Merrill Lynch has forecast. The investment bank warned in its annual economic outlook that America is under attack by the “Four Horsemen” of soaring energy prices, unemployment, a housing slump and an ongoing credit squeeze, but it remained optimistic about prospects for the rest of the world in 2008. The one significant exception to this global “rebalancing” is Britain where a “notable slowdown” is predicted.
Merrill Lynch’s North America economist David Rosenberg presented an almost unremittingly gloomy forecast for the US economy next year. “The US consumer is on the precipice of experiencing its first recessionary phase since 1991 – the last time we had the combination of high, punishing energy prices; weakening employment conditions; real estate deflation and tightening credit conditions” he said.
“We reiterate that real estate deflations are unique and have never ended well for the consumer, the credit market or the economy. We can identify only five periods post WWII when the real value of housing assets turned negative on a year-on-year basis. All of these time periods inevitably included a consumer downturn. Maybe it will be different this time, but we fail to see why,” Mr Rosenberg concluded.
Will the fact that we are mostly a 2nd-home market save us, or protect us from what seems to be certainly coming down the pipe for the USA? That’s a question I don’t have a possible answer for at this time.