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Markets foresee global contraction

France, Ireland, and Denmark are in recession. Others teeter on the edge.

By Staff writer of The Christian Science Monitor / October 7, 2008

In Germany: Lip-biting among traders.

Kai Pfaffenbach/Reuters

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Battered by successive shocks, the world economy may be slipping into multicontinent recession.

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First, the housing bubble burst in the US and some European nations. Then soaring commodity prices hit countries around the world, especially poor food-importers. Now the bank turmoil wrought by the real estate downturn is spreading beyond Wall Street to other financial capitals.

Ireland, Denmark, and France have declared a recession. Germany and Britain are teetering. Even the hot economies of India and China may suffer slowing growth.

"At this point it is a very fragile situation," says Eswar Prasad, an international economics professor at Cornell University and a fellow at the Brookings Institution in Washington. "There is a crisis of confidence more than anything else."

The US economy remains the world's biggest, and its course is a powerful influence on business from London to Kuala Lumpur. While US stock indices continue to gyrate in the face of financial uncertainty, a growing number of economists believe America's economy as a whole is either already in a recession or on the brink of one.

Sixty-nine percent of economists say the US will fall into recession this year, according to a just-released survey from the National Association for Business Economists. That's up from 56 percent in a similar poll taken in May.

"The general view is ... that this recession will be longer than the last two – lasting roughly one year, but relatively mild," the survey concluded.

If financial markets don't stabilize, however, the situation might get worse. The Treasury Department is working as fast as it can to implement a new $700 billion financial rescue bill, but that does not seem to have impressed investors around the world.

On Monday in Asia, the Nikkei 225 closed down 4.25 percent – its lowest point since February 2004. In Europe, Germany's DAX fell 5.04 percent, and France's CAC-40 dropped 5.50 percent.

US markets followed suit at their opening, with the Dow Jones Industrial Average plummeting hundreds of points.

"If financial conditions fail to improve quickly, near-term economic prospects could deteriorate markedly," warned Chris Varvares, president-elect of the National Association of Business Economists and president of Macroeconomic Advisers, in the NABE forecast.

Meanwhile, Europe and Japan appear unlikely to be able to avoid their own recessions.