Fed Chairman Ben Bernanke on Friday said that he’s confident that, despite the U.S. economy’s weak performance and the Labor Department's recent downward revision of the second quarter GDP growth rate from 1.3% to just 1%, things are likely to get better going forward.
But what if he's wrong and things don’t get better?
What if, as economist Nouriel Roubini, who famously predicting the onset of the 2008 financial crisis, is right again and a new U.S. recession is now a 50/50 possibility?
Some analysts in the London office of Fitch Ratings, using an Oxford Economics model, have just published a report laying out what the initial impact on the global economy would be in the hypothetical case that the U.S. economy started to backslide again.
The picture isn’t pretty.
The Fitch team hypothesized a slowdown that would leave economic growth for all of 2011 at an anemic 1%, followed by a recessionary decline in GDP of -0.6% for 2012, with a slow recovery of just 1.5% in 2013.
Those figures would amount to a relatively mild recession by historic standards, they note, although it would be a recession that started with unemployment already stuck at an official rate of 9%.
Nonetheless, the “first found” impacts of such an economic reversal would be profound.
Cumulative economic growth worldwide, they say, would be at least 2.1% lower than Fitch currently predicts. Mexico and Canada -- two of the country's biggest trading partners -- would be hardest hit, suffering losses in output of 4.3% and 2.2%, respectively.
And China, where 8% of the economy represents trade with the U.S., would see its GDP growth fall by 2.7 percentage points, bringing the growth rate down to 7%.
While that might sound high considering the downturn in the U.S. and throughout much of Europe, 7% GDP growth in China is considered the pace required just to accommodate annual growth in the country’s labor force. Such an economic hit in China, besides threatening the county’s fragile political system, would “extend to the rest of the world,” the Fitch analysts warn.
Japan, the Eurozone, and the U.K., in this hypothetical U.S. recessionary scenario, would see growth of their own economies slow by 1.6, 0.9 and 0.7 percentage points, respectively, with the risk that they could be dragged back into recession themselves being “not negligible.”
Fitch analyst Maria Malas-Mroueh, an author of the report, in an interview with On Wall Street, stressed that while Fitch has lowered its estimates for U.S. economic growth for both this year and next, the ratings agency at this point does not expect a return to recession.
“We think that the second half of this year will be better than the first half,” she said, “but we have revised our estimate for the rate of growth for all of 2001 down from 2.6% to 1.8%.”
She added, “We still don’t expect a recession, but back in 2010 we identified a number of triggers which could lead to a double-dip recession, including a re-intensification of financial stress in the Eurozone, weak U.S. housing and labor markets, and something like an oil price spike. Many of the triggers that we identified have now materialized."
She pointed out that the GDP growth rate for the first half was well below a 2% annual rate, and when this has happened historically, the U.S. economy has often slipped later into recession.
"So although our baseline doesn’t call for a double-dip recession, the chances of one have increased," she said.
So far, the Fitch’s analysts, in their report, are just presenting one admittedly disturbing scenario about what would happen if the U.S. were to suffer a double-dip recession.
The scary part, though, is that they’re also saying that the likelihood of their “hypothetical” story coming true has increased since they first began modeling it.
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