A slowdown is in store for the world economy, but thanks to continued growth in emerging markets, the global economy is not headed for another major depression, a research associate with the Conference Board of Canada said at the 2008 Business Outlook Briefing in Toronto on Wednesday.

Speaking about the outlook for the U.S. and global economies, Kip Beckman, principal research associate with economic services at the Conference Board, pointed to notable differences between the economic environment today and that of the 1930s. The unemployment rate in the U.S. is currently 6.1%, compared to a massive 25% in the 1930s, for instance. And while 40% of all mortgages were delinquent in 1934, that number is just 4% today, Beckman said.

But despite the comparatively better environment today, Beckman said the U.S. economy is facing severe challenges, and a recovery could be lengthy.

As long as the inventory of new houses in the U.S. market remains at a higher than sustainable pace, for instance, Beckman said supply will continue to outpace demand and keep house prices low. This won’t happen until more people begin to buy homes.

“It’s going to take a while in the best of circumstances,” he said. “It’s probably going to continue into 2009, and unfortunately home prices are probably going to keep declining.”

In addition, the U.S. economy has lost jobs for nine consecutive months, a trend that Beckman expects to continue for “quite a while.”

Factors such as these are impacting the American economy by driving down consumer confidence and consumer spending. Beckman expects weak consumer spending in the U.S. through 2009, and real GDP growth of 1.7%.

In the case that the government intervention fails to improve the American economic environment, however, Beckman said the growth scenario could be significantly worse. In that case, he expects U.S. GDP could decline by US$175 billion in 2009 and again in 2010, as well as a 1% decline in consumer spending in 2009. A lack of success in government intervention could also drive down investment spending by US$49 billion next year, and lead to another 1.6 million lost jobs in the U.S.

In terms of the long-term implications of the U.S. government bailout package, Beckman said foreign investors could potentially be scared away from U.S. government bonds. He also said the American government will likely run into more difficulties as the population ages and it faces high costs in social security and Medicare programs.

In the meantime, however, there have been signs of good news for the U.S. economy, Beckman said. Specifically, it appears home sales have stabilized and reached a bottom. “That’s probably the first step in a recovery,” he said.

The rate of decline in house prices has begun to slow as well, indicating more good news for the housing market.

Beckman also said demand for U.S. exports has remained strong, which is the only reason that the American economy has not yet slipped into a recession.

“Strong world growth has kept the U.S. above water,” he said.

But with the world economy set to slow next year, the U.S. economy may no longer be able to rely on exports to the same extent. While growth in emerging markets such as China, Brazil, India and Russia remains strong, it is expected to soften in 2009.

Still, Beckman said Chinese retail sales have been on the rise — a sign that Chinese consumers are beginning to spend, which could be a source of strength for the world economy.

Overall, a mild recession comparable to that of 2001 is in store for the global economy, Beckman said.

IE