By Mark Huffman
ConsumerAffairs.com
June 9, 2010
Just when consumers decided it was safe to start shopping again, and investing in stocks, worries are mounting that the economy might topple into a double-dip recession. This time, events outside the U.S. are the problem.
The warning flags first appeared in Greece, which is having difficulty meeting its debt obligations. The European banks that purchased Greek Government bonds are now in much the same position as U.S. banks that purchased subprime mortgage securities. Their assets are beginning to look "toxic," and if Greece defaults on those bonds, many banks will likely be in need of a bailout.
As a result of recent events, the global outlook remains unusually uncertain and downside risks have risen significantly, according to Naoyuki Shinohara, deputy managing director of the International Monetary Fund.
In a speech in Singapore this week, Shinohara said the ability of banking sectors to withstand funding shocks is of particular concern.
"A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted," he said.
The problems in Europe come as the U.S. economy shows signs of finally getting back on its feet. Many economists expect the National Bureau for Economic Research (NBER) -- the group that provides the "official" dates for the beginning and end of business cycles -- to declare June 2009 as the bottom of the Great Recession of 2008-09.
One year into recovery
"This means we are almost one year into a recovery, which by most measures is better than anyone expected," said Diane Swonk, chief economist of Mesirow Financial, in her June edition of Themes on the Economy. "However, no one has exactly started to pop champagne corks. The pace of growth since the start of the recovery has been subpar, with growth averaging about half the six-to-eight percent one would expect given the depth of the losses that we endured."
Unemployment is still high but consumer confidence has improved. U.S. businesses have returned to profitability and housing prices appear to have stabilized somewhat. But there is still concern that a deep recession in Europe, caused by a debt crises, will drag the U.S. economy down with it. In the daily volatility on Wall Street, one may witness abrupt changes in investor sentiment about the outlook.
U.S. Federal Reserve Chairman Ben Bernanke sounded a more optimistic note this week, saying the U.S. recovery is likely to proceed at a moderate pace and not fall back into a recession.
"My best guess is we'll have a continued recovery, but it won't feel terrific," he was quoted as saying in an interview with ABC News.
But he said the recovery will not be fast enough to quickly bring down the unemployment rate, now at 9.7 percent.
