US Heads for Recession, but Europe Fares Better: Fitch

The United States is heading for recession despite modest growth in the first half of the year, but strength in Germany is keeping European growth prospects a bit brighter, Fitch Ratings said on Thursday.

Brian Coulton, a top analyst at the credit agency, said in a conference call that a prolonged slowdown in consumer spending would ultimately force a contraction in gross domestic product.

"We are still expecting a US recession in 2008," Coulton said. "The consumer retrenchment is going to be a relatively protracted process."

Fitch remains pessimistic about the outlook for advanced economies, Coulton added, although Europe was faring a bit better.

The agency revised down its 2009 growth forecast for industrialized nations to 1.6 percent from 1.9 percent.

The United States will sputter ahead at a 1 percent growth rate this year, and growth just 1.5 percent in 2009.

Softer prospects in the U.S. rest in large part on a squeeze in low income households, whose budgets are being squeezed between falling home prices and rising fuel costs, Coulton said.

The weak growth outlook will make it hard for the Federal Reserve to raise interest rates despite growing fears of inflation, which stems from record oil and commodity prices.

"We still think the Fed is going to be pretty cautious in terms of how quickly it's going to be prepared to push interest rates up," Coulton said.