Matthew Higgins, Merrill Lynch senior international economist, says that the economies of the United States and other major European nations are likely to slip into a recession this year, but the dip should be fairly “shallow”. He adds that the eventual recovery will be sharper than previously anticipated.

Higgins expects the Federal Reserve to cut the Federal funds rate by another 50 basis points by year-end, following the 50 basis point cut implemented yesterday. That would leave the federal funds rate at only 2% — a 40-year low. He also expects the European Central Bank’s repo rate to be cut by 75 basis points by year-end, to only 3%.

In terms of fiscal policy, Higgins notes that $45 billion in additional spending has already been added to the U.S. budget this year. He also expects further spending and tax cuts, which could bring the total to $100 billion, and directly add 1% to U.S. GDP. Higgins said he thinks additional government spending may also come from Europe, although it is likely to be much more modest in scale.

“Given such significant monetary and fiscal stimulus, we expect U.S. growth will accelerate to about a 4.5% annualized pace by the second quarter 2002,” he says. “As for the euro area, growth should only be slightly less robust than in the U.S. assuming there isn’t a further deterioration in the geopolitical environment.”

Higgins’ outlook also suggests U.S. and global equity markets should provide a major buying opportunity once the shock of the tragic events of September 11 are assimilated.