Gary Duncan, Economics Editor in Davos

23/01/08 "Times Online" -- - A full-blown, prolonged recession in America is now inescapable, with the rest of the world set to be dragged into a severe global slowdown despite yesterday’s emergency US interest rate cut by the Federal Reserve, leading economists said in Davos this morning.

A darkening outlook for the global economy looked set to dominate the week-long World Economic Forum, as plunging stock markets and the Fed’s drastic and dramatic reaction overshadowed the opening of the annual gathering of political and business leaders.

Some of the world’s most prominent economic pundits told an opening session this morning that the Fed’s surprise three-quarter-point cut in US official interest rates was already “too little, too late” to stave off recession in America.

In a bleak discussion of prospects, the economists predicted that Britain, Europe and much of Asia also now face a sharp and unavoidable downturn in their economies, even if they escaped recession.

The Fed itself also came under heavy fire, along with other central banks.

Top policy-makers, including Larry Summers, the former US Treasury Secretary, joined economic experts in delivering a series of broadsides against the Fed.

A series of experts said that the US central bank not only had been “behind the curve” and “asleep at the switch”, but had failed to take necessary, pre-emptive action to curb the emergence of the financial instabilities that triggered the present crisis.

They said that the Fed appeared to have given stock markets an unjustified bailout this week.

Others, including John Snow, Mr Summers’s Republican successor, defended the Fed’s strategy, however, and applauded yesterday’s aggressive rate move.

The ominous assessments of the likely economic fate of the United States this year were led by Nouriel Roubini, the influential economic consultant.

“It’s not whether we have a soft landing or a hard landing in the US, but rather how hard a landing it is going to be,” he said.

“The recession is going to be deeper and lasting ... at least four quarters … It’s going to be a severe recession.”

Professor Roubini said that the Fed’s steep rate cut this week was “too little, too late” to stop a consumer-led slump in the US economy because American consumers were “shopped out”, laden down with heavy debts, and the financial system was under “severe stress”.

He said: “The Fed cannot prevent this recession from occurring.”

His bleak prognosis was echoed by Stephen Roach, the former chief economist at Morgan Stanley and now the investment bank’s chairman in Asia.

He agreed that with American households under financial pressure from debt burdens that were at record highs and the housing market slump, the US economy faced a sharp retreat by shoppers from the country’s Main Street shops and malls.

Mr Roach highlighted how Americans have been spending the equivalent each year of 72 per cent of US national income, far above the 67 per cent average over recent decades.

He gave warning that if spending patterns now fell back to historic levels in a year “it would be the mother of all recessions”.

It was likely that consumer spending would fall back in this way, although over several years, and this was a necessary adjustment from behaviour that had been unsustainable, he said:

“We have used the overvalued home like an ATM [cash] machine, and in doing that we have taken debt loads up to record highs," he said.

"None of that is sustainable. So we have got to take the excess out of consumption.”

He added that the problem was that Americans were saying, “We do not want to stop excessive consumption”, while the rest of the world was saying, “We want you to keep consuming to excess so that we can sell you things you do not need.”

“What kind of a world is this?” he asked.

Both Mr Roach and Profession Roubini said that Europe, Asia or emerging markets could escape fallout from a US recession.

“Europe is not going to get a special dispensation from the global slowdown,” Mr Roach told delegates.

He added that India and China were “not yet at the stage where they can fill the void that is going to be left by the American consumer”.

He said: “I think it is going to be a close call but think we will not actually move into global recession.”

In a poll here, Davos delegates voted a US recession the No 1 threat facing the world. But not all the leading economists present saw a worldwide downturn as inevitable.

Fred Bergsten, director of the well-regarded Washington-based Peterson Institute for International Economics, said: "I believe the world economy has in fact largely decoupled from the US … That means things are much too bleak and pessimistic around here in terms of the outlook.

"My conclusion is that a global recession if inconceivable.”

The Fed’s rate cut this week left delegates sharply divided over the wisdom of its action, and its broader record in running the US economy.

Mr Snow said: “Have the Fed and other central banks been asleep at the switch? No. The issue of whether the central banks are capable of vigorous action, bold action was answered yesterday.”

He said that the Fed’s move should ensure any recession was “short and shallow”.

His predecessor, Mr Summers, gave a damning view.

He said that it was “hard to give a high grade” to the Fed over its recent policy “when they have been consistently behind the curve”.