America heads for 'serious' recession

Global markets reeled this week as banking giant Citigroup revealed a record loss of $9.8bn for the fourth quarter. But expect more writedowns ahead as the US consumer falters.

Global markets reeled this week as Citigroup revealed a record loss of $9.8bn in the fourth quarter amid an $18bn writedown of subprime-related securities, while unexpectedly poor US retail sales also heightened fears of a US recession.

JP Morgan did little to improve the mood, even though it is less exposed to subprime; its fourth-quarter write-off of $1.3bn helped reduce earnings by 21%. American stocks hit a ten-month low and the FTSE 100 slid below the 6,000 level for the first time since August.

European stocks, also rattled by a subprime-induced writedown at Germany's Hypo Real Estate, have reached a 15-month low.

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The biggest bank in the world "has been drenched" by the credit storm, said Nils Pratley in The Guardian. Citi has cut its dividend by 40% two months after saying the payout was safe and has had to secure a fresh injection of capital $14.5bn this time from Middle Eastern and Asian sources. Merrill Lynch announced a $6.6bn bail-out on the same day from investors, including the Kuwait Investment Authority.

More writedowns ahead

Further write-offs of mortgage-backed securities are on the cards as the housing market worsens, given that Citigroup still has $30bn of exposure to collateralised debt obligations (bundles of securities including mortgage-based bonds). According to The Economist, global exposure to subprime loans is around $380bn. Meanwhile, the spotlight is shifting from losses on packaged securities to "worrying" broader trends in consumer credit, said Lex in the FT.

Thanks to accelerating defaults on mortgages, car and credit-card loans, Citigroup had to take a $3.3bn charge for bad US consumer loans in the fourth quarter, compared with just $127m the year before. JP Morgan's provisions for credit losses doubled to $3bn. December's retail sales also point to weakening consumption, unexpectedly sliding by 0.4% month-on-month making 2007 the weakest year for retail sales growth since 2002.

as consumers falter

The spending slowdown by America's savings-short and highly-indebted consumers confirm that "the economy has lost what little forward momentum it had left" in the final weeks of 2007, said Capital Economics. And the outlook for consumption is grim, as David Rosenberg of Merrill Lynch points out. Given the current demand/supply gap, house prices could well fall by another 20%-30%, dampening spending and lowering GDP growth by 1.5% this year and next.

No wonder, then, that Merrill Lynch and Goldman Sachs think America has already entered, or is about to enter, recession. And with the credit and housing downturns looking far from over, you can see why Michael Metz of Oppenheimer & Co, expects this consumer-led recession to be "the most serious of the post-war era".