From credit crunch to global recession
The bad news: in 2008 a global recession is bound to set in. The scant good news: the oil price will fall back and the development of environment-friendly technology will fuel investment.
The story of 2007 was the credit crunch. The story for 2008 will be global recession. Last year, the US home prices collapse was the worst since the Great Depression – a fall of 6% year on year. Starting with the sub-prime defaults, this led to huge markdowns in asset-backed securities and special investment vehicles owned by banks globally.
The sub-prime debacle spread to other credit markets, including inter-bank lending, causing a liquidity squeeze that drove up interest rate spreads to abnormal levels despite the efforts of central banks to inject liquidity and cut policy rates. Eventually, the combined efforts of the Federal Reserve, the European Central Bank and the Bank of England managed to engineer a return to some semblance of normality in inter-bank lending. But the cost of borrowing or insuring against defaults in companies or in their bonds continued to rise sharply.
And there is still a long way to go in the credit crisis. We reckon that ultimate losses to the banks and other leveraged investors across all credit markets could reach more than $600 billion. So far, only $100 billion has been announced.
That is the raison d’être for my forecast of global recession this year.