US faces 'lasting slowdown'

April 7, 2009

US faces 'lasting slowdown'

'I don't expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,' Mr Soros said, adding that in 2010 there might be 'something' in terms of US growth. -- PHOTO: REUTERS

NEW YORK - THE US economy is in for a 'lasting slowdown' and could face a Japanese-style period of relatively low growth with the added problem of high inflation, billionaire investor George Soros said on Monday.

Mr Soros told Reuters Financial Television that rescuing US banks could turn them into 'zombies' that suck the lifeblood of the economy, prolonging the economic slowdown.

Dollar vulnerable GEORGE Soros, whose latest book, 'The Crash of 2008 and What it Means,' has made prescient calls during the credit crisis. A year ago, he told Reuters that global losses were likely to top US$1 trillion. US and European banks have recorded more than US$700 billion in losses and write-downs, as of Feb 5, 2009, according to Reuters data. ... more

'I don't expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown,' Mr Soros said, adding that in 2010 there might be 'something' in terms of US growth.

Most economists expect the US economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to a latest monthly poll of forecasts by Reuters.

The recovery will look like 'an inverted square root sign,' Mr Soros said: 'You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down - step down.'

In the fourth quarter, the US economy contracted at a 6.3 per cent annualised rate, and economists think the first quarter's slide will be at least as severe, if not worse.

Healing the banking system, which is 'basically insolvent,' and housing markets is crucial to recovery, Mr Soros said.

The public-private investment funds - unveiled by the Treasury last month to get bad debts off bank balance sheets - are going to work but won't be enough to recapitalise the banks so they are able to or willing to provide credit, he said.

Even a steep yield curve won't generate enough profits to keep the banks out of their vulnerable situation.

'What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.

'Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive.' -- REUTERS

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