Global Economy `Close' to Recession in 2009, UBS Says

By Shamim Adam

Aug. 7 (Bloomberg) -- The world economy is ``precariously close'' to a recession in 2009, UBS AG said as it cut next year's global growth forecast due to a U.S. slowdown.

Global gross domestic product will expand 2.9 percent next year, from an earlier prediction of 3.1 percent, UBS chief economist Larry Hatheway wrote in a report published yesterday. UBS considers a 2.5 percent global growth rate as one that is consistent with a recession.

A global recession would be the first since 2001-2002, and may ease inflation that's already projected by the International Monetary Fund to be the fastest in nine years. The U.S. Federal Reserve this week left interest rates unchanged for a second consecutive meeting, and the European Central Bank and the Bank of England, gathering today, are forecast to do the same.

``Softer global economic activity for longer suggests peaking and then declining inflation,'' Hatheway said. ``A sustainable recovery of 'risk' assets probably requires policy recognition that the primary macroeconomic challenge remains weak growth, not temporarily high inflation.''

The Fed will cut interest rates by a further half percentage point this year, from the current 2 percent rate, UBS predicts. The ECB and the Bank of England will probably lower borrowing costs next year, Hatheway said.

`Considerable Stress'

``Labor markets have softened further and financial markets remain under considerable stress,'' the Federal Open Market Committee said Aug. 5. ``Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.''

The U.S. housing slump last year sparked a credit market rout that's still rippling through the global economy. Higher interest rates are causing housing-led expansions to crumble in the U.S. and Europe, and financial institutions worldwide have posted about $492 billion of credit losses and markdowns since the start of 2007, according to data compiled by Bloomberg.

``Until policy stances shift, credit and equity markets will have to contend with cyclical weakness and probable earnings downgrades, in particular for 2009 estimates,'' Hatheway said.

The world economy will grow 3.4 percent in 2008, compared with a previous prediction of 3.3 percent, the report said. UBS lowered its forecast for U.S. growth in 2009 to 1.1 percent, from 1.8 percent, even as it raised its estimate this year to 1.3 percent from 1.1 percent.

The global economy will expand 4.1 percent in 2008, and 3.9 percent next year, the IMF predicted in a July 17 report as it increased its estimates from projections in April.

``The world is underestimating the extent of a synchronized economic slowdown that is going to happen,'' said Venkatraman Anantha-Nageswaran, head of research for Asia and the Middle East at Bank Julius Baer & Co. in Singapore. ``2009 will definitely be more disappointing than 2008.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net