US Subprime Crisis Will Not Peak Until 2009: S&P

The U.S. subprime housing crisis will not peak until 2009 and total defaults could reach $150 billion, rating agency Standard and Poor's said on Tuesday, but robust emerging markets would help keep global growth strong.

AP

S&P expected the world economy to grow 3.6% in 2007 and 3.5% in 2008. The U.S. economy would lag at 2% in both years, down from 2.9% in 2006.

"World growth remains strong despite the weaknesses seen in the U.S. economy -- especially in emerging markets because of healthy domestic demand conditions and export strength to non-U.S. market," S&P said in a report released in Mumbai.

"The fact that the U.S. slowdown is concentrated in housing, which has relatively low import content, helps," it said.

Emerging markets were far less vulnerable to credit market turmoil than during previous crises because of the capital flows attracted by high economic growth coupled with improved corporate governance standards, S&P said.

Moreover, high commodity prices were also helping many emerging market economies, such as Latin American and African countries that are major exporters.

Housing Weakness

S&P estimated that, on a purchasing-power parity basis, the United States would contribute only 9% of world growth in 2007, compared to China's 33% and India's 12%.

Housing was the major weakness in the U.S. economy and the subprime crisis -- which roiled global markets in late July and August -- was far from over, although its shock value was wearing off, David Wyss, S&P's chief economist, said.

"We think in the United States the housing market is not going to bottom until winter. We think the losses in these sectors won't really hit their peak until 2009," he said.

That would feed through to unemployment and remain a brake on growth.

"Housing starts are going to drop further, the unemployment rate is going to tick up further, we are expecting another year of sluggish U.S. economic growth," Wyss said. "We are not halfway through with this crisis yet."

Wyss expected the U.S. trade deficit to shrink in coming months as stronger overseas growth and a weaker dollar would make U.S. exports more competitive.

Copyright 2009 Reuters. Click for restrictions.