“…The United States is heading for a severe recession that could cause China’s economic growth to slide to 8 percent and make Beijing less willing to let the yuan appreciate, U.S. economics professor Nouriel Roubini said on Thursday…”

By Susan Fenton
Source: Reuters

The United States is heading for a severe recession that could cause China’s economic growth to slide to 8 percent and make Beijing less willing to let the yuan appreciate, U.S. economics professor Nouriel Roubini said on Thursday.

“Downside risk to growth will emerge in China because of the U.S. recession,” Roubini, economics professor at New York University’s Stern School of Business, said at a business lunch in Hong Kong on Thursday.

“If exports and growth slow, the willingness of China to let the yuan appreciate will be less.”

Roubini, who is chairman of the economics Web site, RGE Monitor, believes the United States is already in a recession that will last until the middle of next year.

While U.S. gross domestic product grew 0.6 percent in the first quarter, that was due to a build-up of unsold goods, masking an underlying recession as residential and non-residential investment and corporate capital expenditure are falling and total employment has declined for four consecutive months, he said.

The U.S. housing recession is the worst since the Great Depression and house prices, which have fallen 15 percent from their peak, could be down 30 percent from the peak by the end of 2010, he said. That will hurt consumption, and once the recession becomes evident, there will be defaults on bonds and corporate and personal loans.

The severity of the U.S. slump will, in turn, trigger a recession in Japan and in parts of Europe as housing bubbles have burst and a strong euro hurts exports. In Asia, weak global demand will cause a severe economic slowdown, though not a recession, as exports and financial markets are hit, he forecast.

China is cushioned by domestic demand and should avoid a hard-landing, but it will still see economic growth slide to 8 percent or slightly below, Roubini said, ending four years of more than 10 percent growth.

Jonathan Anderson, China economist at investment bank UBS, is more upbeat, telling reporters this week that China’s economy is on course to grow 9.5-10 percent this year and 9-9.5 percent in 2010.

“Exports to the U.S. are already quite slow but exports to Europe have been accelerating,” Anderson said. “Domestic demand is still strong, so China should hold up.”

Roubini said China’s unwillingness to let its currency appreciate during an economic slowdown could help prevent a collapse of the U.S. dollar.

“The risk of a collapse of the U.S. dollar is limited because demand from sovereign wealth funds is strong and if (China stopped buying U.S. dollar assets) the yuan would rise,” he said.

Roubini said further interest rate cuts will enable the United States to emerge from recession by mid-2009, by which time the benchmark U.S. federal funds rate could be 1 percent or lower.