World Economy Has 50% Chance of Slumping: Spence

The global economy has a 50 percent chance of slipping into recession as Europe and the U.S. struggle to grow, according to Nobel laureate Michael Spence.

“I’m quite worried,” Spence said in a Bloomberg Television interview in Hong Kong yesterday. “A combined downward dip in Europe and America, which is a good chunk of the industrialized economies, I’m quite sure will take down growth in China particularly, and that will then immediately spread to the rest of the emerging economies.” He put the likelihood of such a scenario “at about 50 percent.”

Spence’s remarks follow cuts in global growth forecasts by institutions from Citigroup Inc. to UBS AG as central bankers from around the world gather for a Federal Reserve symposium this weekend in Jackson Hole, Wyoming. Unlike the aftermath of the 2008 global financial crisis when China cushioned the blow with a stimulus program, this time it would only be able to buffer its domestic economy, he said.

China “cannot make up for the kind of loss of demand that would go with a downturn in the advanced economies,” Spence said. Because Chinese inflation is running at an official rate of 6.5 percent, a figure many economists say is understated, Beijing would be “pretty close to nuts” to fuel further credit growth, he said.

Spence, a professor at New York University’s Stern School of Business who won the Nobel Prize in economics in 2001, said Fed Chairman Ben S. Bernanke, who will speak at Jackson Hole today, has limited room to maneuver.

‘Awkward Spot’

“The Fed is in a very awkward spot, where they have limited additional capacity to do much more than prevent a frail economy and a frail financial system from failing,” he said. “But the expectations of them are so high, and it’s really the government and the fiscal situation and other things which they don’t control that are kind of the main agenda items.”

Spence said that the Fed could seek to encourage lending in order to help bolster the real-estate market.

“They could focus more attention -- in their capacity as overseer of parts of the banking system -- on the housing sector, whose weakness is a big sea anchor that’s holding the economy back.”

Encouraging banks to lend more freely to home buyers or to provide relief to those whose homes are in foreclosure would help unlock consumer spending, he said.

“I just think we’ve been dithering on that front and it’s an important enough component of the problem that maybe the Fed could take a leadership role in focusing attention on it,” the Nobel laureate said.

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