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WHAT’S THE BIGGEST ECONOMIC THREAT?

The choices in last week’s Quick Poll actually came from a Top 10 list of economic trends provided by Global Insight. So who better to comment on the poll than GI US economist Nigel Gault? For the record, Housing Woes topped our readers’ list, at 37% of the vote, while a Weak Dollar took second place at 27%. It was followed closely by Oil’s Stranglehold, the major woe for 25%. Sputtering Fiscal Growth was checked off by 12% of our readers. Here’s what the Lexington, MA-based Gault has to say about the nation’s–and the world’s–fiscal steadiness:

“The number-one question mark on people’s minds is how severe the slowdown is going to be on the US economy. It’s very clear that US growth is going to be the weakest at least since 1992 when it was 1.6%. We’re looking for just under 2% growth now, but that doesn’t quiet tell the story. The next two to three quarters are looking extremely weak, with growth close to zero–and in some quarters less than zero–and an economy that will technically avoid a recession but will feel like a recession.

“These are global predictions we’re making because the rest of the world is important for the US outlook. We believe most regions of the world will decelerate. Europe and Japan will be hit to some extent by the same tightening in the credit markets. Not to the same degree, but they will see tighter credit conditions.

“As long as China’s growth stays robust, the emerging markets will probably do OK. While the rest of the world will have deceleration, they’re a lot further away from recession than the US is. To the extent that their growth keeps going, they’ll be supporting US growth. We’re looking at almost 1% of GDP to be added from foreign trade. It will be late 2008 when we see some overheating problems in China.

“Inflation issues are clearly important and oil is at the heart of that. We do expect to see some easing in oil prices, largely because we expect weak overall growth in the economy.

“But housing is the number-one source of weakness in the US. If the problems in the economy were purely confined to housing you could be confident that we would escape a recession. The risk in the US is that the problems have spread to consumer spending and commercial construction.

“One beneficial side effect of the problems we have at the moment is that they are starting to diminish the global imbalance of current-account payments. The bad news from slowing demand growth is that it slows the economy down. The good news on the foreign exchange side is that it slows the rate of demand for imports.

“In terms of where the dollar is going, the downward trend will continue against some currencies, against the Chinese currency in particular. We do see a possible trough against the euro in 2008, but still a very weak dollar.

“The bottom line on a US recession is this. Last year we probably would have said a 20% risk. Right now we’re seeing a 40% risk of a US recession. But the risks of a world recession are quite low. “

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