David Levy: Recession in US Likely Next Year

The U.S. recovery will continue accelerating, preventing the rest of the world from sinking into economic doldrums, many observers say.

Not so fast, says David Levy, chairman of the Jerome Levy Forecast Center. That scenario will work the other way around, with Europe and China pulling the U.S. into recession, Levy tells Fortune, warning that the U.S. faces a 65 percent chance of a recession by the end of next year.

Although the U.S. economy is gaining steam — for instance, real GDP grew more than 4 percent in the second quarter — much of the rest of the world is faltering. Wide swaths of Europe still suffer from high unemployment and an increasing risk of deflation, Fortune notes.

Once robust emerging markets are slowing. Even China, which was used to growth rates of approximately 10 percent in earlier years, has seen growth slow to almost 7.5 percent.

While the U.S. has been deleveraging, or decreasing debt levels, since 2008, China's debt ratio continued rising unabated and is now higher than the peak U.S. level just before the recession, Levy notes. Debt has continued to finance China's exports, even though exports are slowing as demand for its goods slows. That's bad news when its economic expansion, as well as growth in other emerging markets, is based on exports, according to Fortune.

While it's hard to predict how a crisis will play out in China, in an increasingly connected global economy its downturn will hit the U.S. Europe, which has yet to truly recover from its financial crisis, is even more vulnerable to an emerging markets slowdown, Levy warns. And recession in Europe, in Levy's scenario, would spread to America.

China's huge amount debt is one the most important issues for the global economy, The Economist states, noting that its total debt has soared from 100 percent of GDP in 2008 to 250 percent. Since most financial crashes are preceded by an explosion in debt, it's reasonable to predict China is heading to a disaster.

A Lehman Brothers-style crisis is unlikely because of China's "vice-like grip" on its financial sector and its ability to bail out banks, according to the magazine.

"Instead, the biggest risk is complacency: that China’s officials do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans."
 

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