Danger of US recession 'less than 50/50'

The probability of a recession in the US has increased but is still less than 50/50, former Federal Reserve chairman Alan Greenspan said in comments broadcast yesterday.

Greenspan said he expects consumer spending to slow as the housing market slowdown "significantly" reduces the "wealth effect", but is still not convinced that will lead the world's largest economy to contract.

"The danger of recession has obviously risen, but in my judgment . . . is still less than 50/50. It's less optimistic than one would like," Mr Greenspan told BBC Radio 4.

The US Federal Reserve slashed interest rates last week by 50 basis points to 4.75 per cent in a bid to shield the economy from the fallout of the credit crisis that has swept through financial markets in recent months.

The US economy is shifting into a slower gear, in large part because of the sharp slowdown in the housing market. There are worries that a similar scenario could play out in Britain too.

But when asked if he expected a UK housing market crash, the former Fed chief said such a bleak outlook was premature.

"The probabilities have risen but I'm scarcely at the point where I'm forecasting [ that] we're about to experience significant recessions either in the United States or in Britain," he said.

However, he recognised that all asset bubbles, be they in residential housing, equity or real estate markets, will probably burst if you let them expand long enough.

Mr Greenspan, often criticised for slashing interest rates too quickly in response to signs of financial or economic weakness, said central banks face a very difficult task in managing these bubbles resulting from the long-term trend of globalisation and decline in real interest rates. - (Reuters)