Walker: U.S. in slump well into 2002

Walker says the U.S. slowdown will hit consumers there and spill over into Asia

By CNN's Alex Frew McMillan

HONG KONG, China (CNN) -- The U.S. economy is in recession, CLSA chief economist Jim Walker said Monday, and will not rebound until the second half of 2002.

That is far worse than the V-shaped or even U-shaped recovery many market watchers are hoping for. It also spells big trouble for Asian economies this year.

Government forecasts are too optimistic throughout Asia, according to Walker. He expects many countries to cut their 2001 growth predictions as the year goes on.

Walker is well-known for correctly forecasting the 1997 Asian financial crisis. The poor outlook now means countries such as Thailand and South Korea risk revisiting banking crises, he said.

"The global growth outlook is distinctly weak for the next two years," he said.

'Initial phase' of U.S. slowdown

Walker was speaking at the CLSA (Credit Lyonnais Securities Asia) investors' forum in Hong Kong, which started Monday.

He said the U.S. slowdown was "very early into the initial phase," with interest rate cuts yet to kick in.

Analysts expect the U.S. Federal Reserve Board to cut interest rates by half a percentage point when it meets Tuesday. That would see the Fed funds rate drop to 4 percent.

It would also be the fifth cut in five months, as the Fed tries to come to the rescue of the slowing U.S. economy and its slumping stocks.

But the cut is already priced into the market. Some experts say there could be a sell-off on the news. In any case, they are already looking at the next Fed meeting in June.

Walker said there is room for disappointment if the Fed doesn't act as predicted. He thinks the Fed will keep cutting rates, to 3 percent by the end of 2001 and perhaps as low as 2.5 percent next year.

But those cuts will take four to six months to produce results, he said. Meantime, he believes the U.S. slowdown will broaden.

Consumers to take a hit

The slump has hit business spending, particularly on technology. But household spending has been strong. Consumer confidence also rebounded in May.

Walker said the optimism won't last. The U.S. unemployment rate will rise to 6 percent by the end of the year, from 4.5 percent now, he said.

As job cuts hit home, consumers will lose confidence and stop spending. The slowdown will continue through the rest of this year and into the first quarter of 2002, he predicted.

As a result, Walker forecasts no growth for the U.S. economy in 2002. His 0.0 percent call is well below the consensus estimate of 3.0 percent growth.

Asian spillover effect

Asia will see a spillover effect with job losses of its own, he predicted.

"You've already seen the U.S. export part of its recession out here," Walker said. "What we expect to see over the next couple of years is a lot of companies going out of business."

Corporate reforms started after the Asian financial crisis in 1997. But they only lasted a year and did not go far enough, Walker said. Asian stock markets recovered quickly, taking the pressure off restructuring.

It's back on now, as the slump in U.S. demand for Asian exports hits home. High debt levels will likely mean a growing number of bankruptcies as Asian companies struggle to rationalize operations.

The silver lining is that Asian companies will finally have to produce returns for investors, according to the economist. That could eventually lead to a "golden age" for investors in Asia.

Meantime, though, even the strongest economies will struggle to post gains of better than 4 percent.

In China, for instance, the gross domestic product will rise 3 percent to 4 percent, according to CLSA. That's well below the 7 percent official government forecast.

The Singaporean government in April dropped its growth forecast for the year to 3.5 percent to 5.5 percent, from 5 percent to 7 percent.

Walker said Singapore tends to have realistic forecasts. He expects poor data to force many other Asian governments to follow suit.

Risks are severe in Thailand, South Korea, Indonesia and the Philippines. Low growth rates, coupled with high debt levels, could lead to renewed crises there, Walker said.

The prospects are best in Hong Kong, Singapore, China and Taiwan.

Hong Kong and Singapore are alone among Asian countries in having strong banking systems, Walker said. Taiwan has room to follow U.S. rate cuts. China is propped up by strong overseas investment and a fast rate of restructuring.

"But thereafter I'm hard-pushed to think of positives," Walker said.

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