Will US face second recession in 2010?

Although the US economy is expected to return to growth later this year, there is a danger of a second recession if monetary easing and Tough times a weak dollar lead to increased inflation expectations, a report said.

Massive stimulus spending and moves by the Federal Reserve to fuel economic activity is expected to jump-start the anemic US economy in the last quarter of this year after it contracted 6.3 percent in fourth quarter of 2008.

But the Fed's moves to boost the economy by slashing interest rates and buying up billions in government debt could have undesired consequences, The Conference Board, a private research group, said in the report.

"If the United States experiences a too-rapid recovery, there may be a risk of another recession in 2010," said Bart van Ark, vice president and chief economist of The Conference Board.

"It may fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery," he said.

The U.S. economy has the potential for a "double-dip" recession, Van Ark noted, similar to 1980 and 1982, as commodity prices rise on the back of a falling dollar and monetary easing.

He added, however, that the likelihood of this scenario taking place is small as deflation risks are great, while government stimulus spending should stem further economic decline and ease the flow of job losses.

The U.S. economy could contract by 2.6 percent in 2009, the largest annual decline since 1946, the Conference Board said.

Agencies

India's factory output falls for first time in 13 years

India's factory output fell for the first time in more than 13 years in October, further evidence of a rapid economic slowdown which could spark more monetary easing by the Reserve Bank of India (RBI) after aggressive weekend rate cuts.

Industrial output declined 0.4 percent in October from a year earlier, the first annual drop since data in the current series became available in April 1995, and sharply below the previous month's upwardly revised 5.5 percent.

The figure was below a forecast for growth of 2.2 percent in a Reuters poll of economists. Manufacturing production in Asia's third-largest economy fell 1.2 percent from a year earlier, data showed on Friday.

"It is a shocking figure and only underlines the fact that the Indian economy is in a very bad situation," said T.K. Bhaumik, economist at JK Industries Group. "This is a wake up call for the government."

Bhaumik called on the government to consider additional stimulus to that announced at the weekend and to use fiscal measures to lift consumer demand. Lending banks should move fast to pass on the RBI's recent rate cuts.

"Since the RBI has already done its job, now commercial banks should be fast to ease the credit line," he said referring to the Reserve Bank of India.

The Reserve Bank of India (RBI) Governor Duvvuri Subbarao has said India faces a period of painful adjustment after the global financial crisis froze credit markets in October, further weakening an economy struggling with high borrowing costs.

Subbarao said the bank's growth forecast for 2008/09 was likely to be cut from 7.5-8.0 percent. Many private economists expect it to dip below 7 percent.

The RBI cut its main rates by 1 percentage point on Saturday, lowering its key lending rate for the third time since October, and has indicated that it was ready to act again to bolster an economy slowing much faster than expected.

The government followed up with an additional $4 billion in additional spending to stimulate activity. The benchmark 10-year bond yield plunged to its lowest in more than four years after the data was published on increased expectations of further central bank action.

Industrial output rose 8.1 percent in the 2007/08 (April-March) fiscal year, compared with 11.6 percent in 2006/07.

Source: Agencies