World May Be Lucky to Get Worst Recession Since 1983 (Update2)

Oct. 13 (Bloomberg) -- The world may be heading for its worst recession in a quarter of a century -- if it's lucky.

A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.

``It's certainly going to be the worst since the 1980s,'' says Bradford DeLong, an economics professor at the University of California at Berkeley who worked at the U.S. Treasury Department from 1993 to 1995. ``The hope is that it won't become the worst unemployment business cycle since the Great Depression.''

Of special concern: The two big bulwarks of the global economy in recent years
-- U.S. consumer spending and
-- the rapid growth of emerging markets
may be finally giving way in the face of the 14-month-old financial turmoil.

``This is the worst crisis I've seen in my 50-year career,'' William Rhodes, senior vice chairman of Citigroup Inc. in New York, told fellow bankers in Washington yesterday. ``We still have to deal with the effects on the real economy here and elsewhere.''

One of his predecessors wasn't so shy. ``It's hard to imagine it not being the worst recession in at least 25 years,'' says Kenneth Rogoff, who is now a professor at Harvard University in Cambridge, Massachusetts.

``You can take most of the official forecasts for 2009 and knock two'' percentage points off of them, he adds. That would make it the worst slump since 1982, when the world economy grew 0.9 percent.

``We're heading into a global recession,'' Simon Johnson, also a former IMF chief economist and now a senior fellow at the Peterson Institute for International Economics in Washington, said last month.

Even if the financial markets settle down soon, the deepening decline will put pressure on central bankers to cut interest rates further and on finance ministers to reduce taxes and boost spending.

``There will be more cuts out of all of the central banks,'' says Ethan Harris, economist at Barclays Capital Inc. in New York. ``We are looking at a global recession, and it isn't going to turn quickly.''

Ripples

Household finances are also being pinched. The steep decline in U.S. stock prices last week alone wiped some $2.16 trillion from investors' wealth. And banks are getting stingier with credit: Borrowing by U.S. consumers fell in August by the most on record as lenders shut access to loans, according to data from the Fed.

The consumer pullback is already sending ripples throughout the economy. Vacancies at U.S. neighborhood and community shopping centers rose to a 14-year-high in the third quarter, New York-based real-estate research firm Reis says.

A sharp reduction in household spending could turn what is shaping up to be the biggest contraction since the early 1980s into something worse, Bruce Kasman, chief economist at JPMorgan Chase & Co. told a meeting of the Institute for International Finance in Washington yesterday.

The U.S. economy is headed for a ``fairly significant recession,'' and unemployment may peak at more than 9 percent, Microsoft Corp. founder Bill Gates III said at the Harvard Business School in Boston today.