Fitch says time to look at macro implications of sub-prime crisis

Fitch says time to look at macro implications of sub-prime crisis


SINGAPORE: With some recent US economic data surprisingly on the upside, some analysts are starting to say that the worst of the US sub-prime mortgage crisis is over.


However, international ratings agency Fitch said the repercussions could go well into the next year.


Even though low interest rates in the US and fiscal monetary stimulus will help support consumption and buffer against any US recession, Fitch is still expecting a rough ride for the world’s largest economy.


James McCormack, managing director of Sovereigns Ratings, Fitch Ratings, said: “We are looking at weaker growth and our assumption is that there is going to be a relatively short and relatively shallow recession, and by the tech meaning of that – likely two quarters of negative growth.


“It is easy to draw a scenario which is worse than that, where household growth is weaker because household balance sheets are very exposed to continued decline in US house prices and we really don’t know when that is going to end.


“But household debt numbers are extremely high and household savings rates in the US are extremely low. You combine that with a weaker labour market and weaker overall housing prices and you can easily get a scenario where consumption is much worse than we were anticipating.


“Typically, US consumers surprise us on the upside so we are not prepared to write them off just yet.”


For the whole year, though, Fitch said the US economy would be able to show some growth. So far, Fitch has forecast that US GDP will increase by 1 percent this year and the economy may grow by 1.5 to 2 percent in 2009.


Fitch said it is now time to start looking at the macro implications of the sub-prime crisis globally and in the US.


McCormack said: “I think we can say the worst of the sub-prime in terms of sub-prime adjustments are over. I think we have a better feel of what the losses are going to be in the banking sector.


“Now, we’re into the second stage or another stage of the problem – What are the other macroeconomic implications? What does this mean for credit growth in the US?


“What does it mean for credit growth globally? And what does weaker credit growth mean for the US economy? How will households respond and how will they react?”


Fitch expects growth in Asian economies to moderate this year because of the US slowdown. China and India, though, are still seen to be leading the world in terms of GDP growth.


Source: Channel NewsAsia


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