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World economy may be on verge of recession, experts warn

WASHINGTON — Discouraging economic data from around the globe have heightened fears that another recession is on the way.

Fresh evidence emerged Thursday that U.S. home sales are weakening and that European banks are increasingly burdened by the region's debt crisis and sputtering economy.

The rising anxiety ignited a huge sell-off in stocks that led many investors to seek the safety of U.S. Treasuries.

Asian markets started Thursday's drop. Japan's Nikkei 225 index fell 1.3 percent. The main stock indexes in South Korea and India each dropped a little more, then Europe more than that — 4.5 percent in Britain and 5.8 percent in Germany.

In the United States, the Dow fell 419.63 points, or 3.7 percent, to 10,990.58. The Standard & Poor's 500 index fell 53.24, or 4.5 percent, to 1,140.65. The Nasdaq composite fell 131.05, or 5.2 percent, to 2,380.43.

The Dow is down 13.6 percent since stocks began falling July 21 — four weeks that have rattled Americans watching their retirement savings and other investment accounts shrivel.

Economists say the economic weakness and the stock markets' wild swings have begun to feed on themselves. Persistent drops in stock prices erode consumer and business confidence. Individuals and companies typically then spend and invest less. And when they do, stock prices tend to fall further.

"A negative feedback loop … now appears to be in the making" in both the United States and Europe, Joachim Fels and Manoj Pradhan, economists at Morgan Stanley, said in a report Thursday. Both economies are "dangerously close to a recession. … It won't take much in the form of additional shocks to tip the balance."

The risk of a recession is now about one in three, according to Morgan Stanley and Bank of America Merrill Lynch.

Some sectors of the U.S. economy still show strength: Retail sales are up. Gas prices have fallen. Job growth has been consistent, though below what's needed to reduce the unemployment rate.

Yet a consumer survey taken this month showed confidence in the economy fell to the lowest level in 31 years.

Investors are growing more anxious about Europe's financial situation and its leaders' ability to resolve the debt crisis.

European banks are being forced to pay more for the short-term loans they need to finance day-to-day operations. Some with heavy exposure to the debts of Greece and other weak countries are relying on loans from the European Central Bank because other private banks are reluctant to do business with them.

World economy may be on verge of recession, experts warn 08/18/11 [Last modified: Thursday, August 18, 2011 11:09pm]
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