Worsening economy predicted

Speakers at the Cayman Business Outlook conference at The Ritz-Carlton, Grand Cayman on 22 January think the US economic slump is likely to worsen.

The five guest speakers, for the most part, said indicators point to a recession that could last from six months to three or more years before economic recovery.

The US is feeling the worst of the recession right now said economic expert Todd Buchholz, who was the most optimistic about a shorter time before recovery.

‘The next six to eight months will be particularly difficult for the US,’ said Mr. Buchholz. ‘But I think we will see an upswing, signalling the start of a recovery, in time for back to school shopping at the end of the summer.’

When the financial crisis hit Wall Street last year, the gates of the banks slammed shut explained Mr. Buchholz. Without bank credit, businesses have a tough time operating and consumers stop spending. The US financial crisis and deepening recession had a knock-on effect that spread to other countries around the world including most of Europe, Iceland and even emerging markets such as Brazil, Russia, India and China.

But when the US starts the upswing, it is also likely to be the locomotive that pulls along other countries said Mr. Buchholz.

But how each country recovers and to what degree will vary, depending on the financial shape it was in before the recession added Mr. Buchholz.

For instance, Mr. Buchholz said two major oil producing countries are Mexico and Norway.

‘They both made a lot of money when oil was over $140 a barrel. Norway saved its money, but Mexico spent theirs.’

American consumerism is the key.

‘The question is – with rising unemployment and sinking home prices – when will the US consumer finally recover?’ said Mr. Buchholz.

Business professor and keynote speaker Charles Calomiris tracked the elements that pushed the US into a recession and lead to an international financial crisis as well as the current economic status.

Two key factors that played a significant role in the financial crisis was the US government mandate to increase home ownership. Another factor was federal regulators turning a blind eye to clear problems inherent in the real estate and financial institutions explained Mr. Calomiris.

The combination of easy credit for people who couldn’t afford to buy homes and the lack of regulatory oversight lead to a real estate crash that spread like a virus throughout world markets.
Fannie Mae and Freddie Mac could have as much as $1.5 trillion in assets with some form of exposure to subprime mortgages, said Mr. Calomiris.

Today, unemployment is 7.2 per cent and rising and mortgages foreclosures look like they could impact three million homes, he added.

Nilesh Vasani, the CEO of Empyrean Re Ltd., said the world had begun a time of de-leveraging as it moved away from a credit-based financial system towards a cash-based one.

‘We’re going through a cleansing of our financial system,’ he said.

Mr. Vasani was not optimistic about a quick recovery from the economic crisis, which he said could still be worse that the Great Depression if not handled properly.

In the end, he said he believed the US Government had no choice but to step in and try to rectify the situation.

‘US demand has rescued the world [in past economic crises]; who except for the US Government will rescue the US?’ he asked.

Mr. Vasani thinks the $819 billion economic stimulus package approved by the US Congress last week will help, but it will not prevent unemployment rates from rising and GDP from falling through 2012.

‘De-leveraging has an [undeniable] impact on the economy,’ he said.

Even though he does not see an economic recovery in 2009, Mr. Vasani said he thought it would be an important year because starting now, there needed to be some realisations about the nature of economy.

He said it was important for people to understand that fluctuations, including booms and downturns, were natural parts of the economy.

Mr. Vasani said he thought 2009 would be the beginning of a structural economic evolution.

‘We’re moving past money manager capitalism, leaving behind an era of leverage and requirements for very short-term gains,’ he said. ‘We’ll have learned to be content with single digit returns.’

Looking at the investment markets, Mr. Vasani said ‘buy and hold’ was over, and he suggested most people steer clear of the commodities markets for a year or two because of their uncertainty, even though he predicted severe shortages in commodities due to the lack of credit to commodities’ producers.