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US recovery is looking strong

WHATEVER the future for the global economy, the US is well positioned to recover from the recession and retain its hegemonic status, City consultancy firm Fathom will say today. In contrast the outlook for the Eurozone and the UK remain bleak.

In its second quarter outlook for the G4 economies (US, UK, Eurozone and Japan), the financial consultancy argues that the US has achieved the necessary adjustments to its labour market and has been unusually aggressive in shedding labour over the past 18 months, whereas the majority of firms in the Eurozone and the UK have been hoarding labour.

As a result, productivity growth in the US is very strong, says Erik Britten, a director at Fathom. This, he says, will make American firms more competitive and any rebalancing in China towards domestic consumption should give US exporters more scope.

In the forecast’s central case scenario, which assumes sluggish growth in the world economy, the US is predicted to grow this year by 2.9 per cent, while both the Eurozone bloc and the UK will only manage to expand by 1.2 per cent. In the upside scenario, which has a 25 per cent probability of happening, the US economy surges back to robust growth and achieves GDP growth of above 4.5 per cent both this year and next.

The downside scenario is more worrying, with markets penalising economies that have high levels of sovereign fragility. “Were this risk to crystallise, we would expect to see sharply steeper yield curves, as longer-dated yields rise sharply,” says Fathom, warning such an event would cause an unwelcome jump in borrowing costs and induce a double-dip recession.

The real risk is Britain with the spectre of a hung parliament looming over the country. In Fathom’s view, the risk of the UK losing its prized triple-A rating is currently about 20 to 30 per cent and in the downside scenario, the UK will only grow by 0.1 per cent this year before sliding back into recession and shrinking 0.5 per cent in 2011.