US hopes the worst is over

The National Staff

• Last Updated: April 19. 2009 7:45PM UAE / April 19. 2009 3:45PM GMT

Paul Volcker, the head of the US Economic Recovery Advisory Board, said the rate of the country’s economic decline is beginning to slow. Mannie Garcia / Bloomberg News

Senior US officials believe the worst of the recession might be over, despite predictions by the Organisation for Economic Co-operation and Development (OECD) that the world economy remains in a state of “extreme uncertainty”.

Two US Federal Reserve policy makers, Donald Kohn, the vice-chairman, and William Dudley, the New York Fed chief, have both pointed to signs that measures taken by the central bank are working to help revive the biggest economy in the world.

But the global picture looks more “uncertain”, according to the 30-country OECD, which has been one of the most pessimistic of the multilateral groups about the global downturn.

“We are in a period of extreme uncertainty but to be optimistic I would say that at least there are some indicators which are not as bad as they were in the past,” Pier Carlo Padoan, the OECD vice director, said in Berlin on Saturday.

His comments were made a few hours before Paul Volcker, a senior economic adviser to the Obama administration and a former US Fed chairman, said the rate of economic decline was set to slow.

Even so, Mr Volcker, who like the other US officials spoke at a conference in Nashville, Tennessee, said the US economy faced a “long slog” towards recovery.

Fed officials often stress there is a lag before the economy responds to measures taken to support growth, such as interest rate cuts. Since the financial crisis erupted in 2007, the Fed has progressively cut its benchmark lending rate from a peak of 5.25 per cent to a range last December of zero to 0.25 per cent.

The Fed has also created programmes to support credit markets and revive lending in different segments, especially home mortgages.

While the central bank’s emergency measures have caused the Fed’s balance sheet to balloon to more than US$2 trillion (Dh7.34tn), Mr Kohn and Mr Dudley dismissed worries that the measures could lead to inflation, saying they have plenty of tools to drain excess cash from the system when necessary.

He was “not worried at all that” a doubling in the Fed’s balance sheet would spur inflation, said Mr Dudley.

Mr Volcker, known for aggressive interest rate hikes to combat spiralling inflation when he was the Fed chairman in the 1980s, said the unprecedented tumble in economic activity late last year had left the US economy “in a great recession”.

“None of us has seen a decline in economic activity at the rate of speed seen late last year,” said Mr Volcker, who has been enlisted by Barack Obama, the US president, as part of a heavyweight economic team.

Most economists see the fourth quarter of last year, when GDP shrank by 6.3 per cent, and the first quarter of this year as the low point. Mr Kohn stressed the recession was “global and would require a global response”. He said the era of relying on the free-spending US consumer was over and that the phenomenon was “never sustainable”.

“Now US consumers are pulling back, obviously, and are going to be amassing savings by not spending,” he said, adding that the central bank’s attempts to heal ailing credit markets and spur an economic recovery have been working gradually.

“The situation in financial markets and the economy would have been far worse if the Federal Reserve hadn’t taken the actions we did.”

Despite brighter economic news filtering through from the US, the global economy is still fragile, according to OECD.

Last month, the Paris-based group predicted member economies would shrink by 4.3 per cent this year with the recession continuing into next year, a more negative forecast than figures from the World Bank.

But Mr Padoan, talking on the sidelines of an economic conference in Berlin, said there were some positive signs emerging. He cited a turnaround in the US financial market, and stabilisation in some national housing markets, but insisted these remained isolated data. “To turn these figures into an economic outlook is not only extremely difficult, but would be mistaken,” he said.

* with Reuters, Bloomberg