A correction in the U.S. real estate market “has materialized and is now beginning to seriously impact the overall economy,” according to a report released today by UBS, a global financial firm.
The “UBS Global Outlook” report also states, “We do not expect the U.S. economy to pick up again until the fourth quarter of 2007, when the combined effect of interest-rate cuts and a gradual turnaround in the construction cycle should take hold.”
Annualized quarterly growth in residential investment in the third quarter dropped to — 17.4 percent, according to the report, and the forecast calls for U.S. growth of 2 percent for the next few quarters and for the 2007 year.
“(Gross domestic product growth will probably remain below its long-term trend in 2008 as well, but this does not mean that we need fear a recession in the coming quarters,” the report states. “For that to happen, the U.S. Federal Reserve would have to adopt a much more aggressive stance than the one that caught some market participants on the wrong foot at the end of June, when it called a halt to its tightening cycle after nearly three years of uninterrupted rate hikes.”
UBS anticipates that the Fed will cut the federal funds rate over the next few quarters, for a total 1.25 percentage point reduction to 4 percent by the close of 2007.
“This should cushion the flagging economy in good time and lend it renewed momentum in the medium term,” according to the forecast report.
In the global outlook, there are risks that “the global economy may not so easily absorb the pressure of the U.S. slowdown, or that the U.S. economy actually might enter into a recession,” according to the forecast.
There is also the possibility for a downward trend in oil prices, “which would add some consumable income to the pockets of private households and could improve their sentiment. In the U.S., the still buoyant labor market might compensate for the negative housing market effects.”
Bond yields have been historically low this year, though slightly higher than 2005, UBS reported.
“It seems that investors looked beyond current developments, focusing on the future instead. And the economic future is looking somewhat less bright. A weakening housing market could heavily dent the sentiment of U.S. consumers, who, through their domestic spending and their abundant imports, had been stimulating the U.S. and the global economy,” the report states.
“And the rediscovery of fiscal prudence in Europe should begin to slow an economy that had just gained momentum. Finally, thrifty Japanese consumers will hardly be able to compensate for reduced spending by their government, which is struggling with a heavy public debt burden. We expect that, in many countries, growth and inflation will come in weaker than the consensus among economists currently anticipates.”
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