George Soros predicts a US recession in 2007

George Soros alarmed an audience in Singapore this week by claiming that 'the soft landing (for the US economy) will turn into a hard landing. That's why I expect the recession to occur in 2007 not 2006.'

He went on to explain that the slowing US housing market would be the factor that finally tripped the economy into recession, albeit not until 2007. Of the Federal Reserve and interest rates he commented:

'Almost inevitably, they have got to overshoot because they can't stop (raising interest rates) until the economy shows signs of a slowdown. By the time it shows these signs it may be a little too late. I happen to be on the pessimistic side.'

Mr. Soros maintains that the impact of higher energy prices on the US economy has been cancelled out almost entirely by the impact of rising US house prices to date, although inflation was up and economic growth had slowed in many economies.

Central bankers optimistic

On the other hand, European Central Bank President Jean-Claude Trichet told reporters that G10 central bankers meeting in Switzerland had concluded that global growth 'could be a bit higher in 2006 in comparison with 2005'.

However, the central bankers made no comment about the outlook for 2007, except in the vaguest of terms, and Mr. Trichet refused to comment on the risk of a US recession in the wake of the recent yield curve inversion.

For Middle East economies a US recession is the most feared global economic event. In the past US recessions have always sharply lowered energy prices and liquidity in the region. This in turn has depressed local stock markets and real estate.

But with their treasuries full after six years of rising oil prices, spending by the Oil States is unlikely to fall flat, and indeed could rise to stave off any short-term economic downturn. Certainly the many projects that are underway would not be abandoned, the impact would fall on those still in the planning stage.

2006 looks good

In the meantime, both Mr. Soros and the G10 central bankers seem agreed on a good year ahead for 2006 but perhaps business in the Middle East should make hay while the sun still shines.

Is it not logical to assume that the impact of high oil prices will be felt on the industrialized economies, and that other forces have counter-balanced this impact so far? And is it not likely that these forces are linked to low interest rates and the real estate boom worldwide?

With the Federal Reserve now tightening interest rates and housing markets cooling, then higher oil prices may now start to exert downward pressure on the industrialized economies. Then indeed a recession is in prospect, albeit somewhat delayed.