Just as the US economy strengthens, other countries threaten to drag it down. Employers in the US are creating jobs at the fastest pace since the late 1990’s and the economy finally looks ready to expand at a healthy rate.
But sluggish growth in France, Italy, Russia, Brazil and China suggests that the old truism “When the US sneezes, the rest of the world catches a cold” may need to be flipped.
Maybe the rest of the world will sneeze this time, and the US will get sick.
That’s the view of David Levy, who oversees the Levy Forecast, a newsletter analysing the economy that his family started in 1949 and one with an enviable record. Nearly a decade ago, the now 59-year-old economist warned that US housing was a bubble set to burst, and that the damage would push the country into a recession so severe the Federal Reserve would have no choice but to slash short-term borrowing rates to stimulate the economy. That’s exactly what happened. Now Mr Levy says the United States is likely to fall into a recession next year, triggered by downturns in other countries, for the first time in modern history.
“The recession for the rest of the world … will be worse than the last one,” says Mr Levy, whose grandfather called the 1929 stock crash and whose father won praise for anticipating turns in the business cycle, often against conventional wisdom.
Mr Levy’s forecast for a global recession is extreme, but worth considering given so much is riding on the dominant view that economies are healing. Investors have pushed US stocks to record highs, and Fed estimates have the US growing at an annual pace of at least 3 per cent for the rest of the year, and all of 2015. Investors have also poured millions of dollars into emerging market stock funds recently, on the hope that economic growth in those countries will pick up.
Worrying signs are already out there. European banks are still stuck with too many bad loans from the financial crisis. Household and business debt there is too high.
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