The economic outlook for the world's richest nations has taken another punch from a year-long credit crisis which has pummelled financial markets in recent weeks while inflation accelerates, a Reuters poll showed.
While US growth fared better in the first half of the year than many people had forecast a few months ago, economists are taking a hatchet to next year's numbers and now predict interest rates will hold steady instead of rising imminently from two per cent.
That wait-and-see attitude holds for most rate-setters across the G7, which comprises the United States, Japan, Germany, Britain, France, Italy and Canada.
"Central banks are on an extraordinary tightrope between staving off recession and containing inflation," said Stephen Pope, economist at broker Cantor Fitzgerald in London.
The poll of around 250 economists was taken from July 16 to 23, after US Treasury Secretary Henry Paulson announced steps to shore up struggling mortgage financiers Fannie Mae and Freddie Mac, a plan that has calmed stock markets for the time being.
The poll found US rates are set to remain on hold until end-March 2009 but should end next year one percentage point higher, at three per cent.
While growth prospects are falling away sharply for Britain, and dimming in Germany, Italy and Japan, economists are not optimistic either that inflation will soon be tamed in the G7. Economists raised their 2008 US gross domestic product growth forecasts to a median 1.3 per cent, annualised, from 1.1 per cent predicted last. But they slashed the 2009 consensus by 0.5 percentage point to 1.8 per cent.
Still, the fact that few analysts have forecast two straight quarters of shrinkage in gross domestic product – the typical definition of recession – may be grounds for optimism that the US may escape the clutches of the credit crunch sooner than many expect.
Much will depend on how quickly the US housing market, which has seen average prices fall more than 15 per cent from their peak and is in the midst of its worst period since at least the World War Two, will find a bottom.
The outlook for Britain, where housing prices are falling sharply following a boom of the past decade, is crumbling and has many economists making comparisons with two years ago in the United States.
The median UK recession probability has risen to 40 per cent from 30 per cent last month, double the 20 per cent likelihood polled at the start of this year.
Inflation in the UK is set to soar even higher in the next few months – with a few banks saying it will average over five per cent in the last three months of this year.
Interest rates in the eurozone, Japan and Canada look set to stay at current levels until well into 2009.
For the UK, economists reckon the next move is down, in the first quarter of next year.
They still say the same for the European Central Bank, despite all the hawkish rhetoric from officials and the pre-emptive increase to 4.25 per cent a few weeks ago. The poll found a median 30 per cent probability of a recession in the 15-member euro area, up from 15 per cent.
For Japan, economists as a group have delayed yet again an interest rate increase to 0.75 per cent until the July-September quarter of next year. With inflation seen peaking soon and a great deal riding on US demand for Japanese exports the conviction behind forecasts of a BOJ rise is thin.