The US is likely to move into a recession, according to Han de Jong, chief economist at ABN Amro Bank in Amsterdam. He attaches a 75 per cent chance to a recession in the US some time before the end of 2008. This contrasts with the 40 per cent chance attached to this scenario by Barclays Wealth on 18 December 2007.

“For now, we are calling for a relatively mild US recession, provided that economic policy, in particular monetary policy, is eased significantly. However, the downside risks to this mild recession scenario are at least as large as the upside ones.”

Mr De Jong believes that a self-reinforcing vicious spiral between the real economy and the financial markets is developing and is unlikely to be stopped, or reversed.

He also believes that the Fed must continue to act swiftly and decisively. “We believe that the Fed will do exactly that, taking the fed funds rate from its current 4.25 per cent to below 3 per cent by the end of 2008.”

Although the European economy is showing early signs of slowing, Mr De Jong expects the region to cope relatively well with a mild US recession. European consumers are generally not highly leveraged and significant belt-tightening should therefore not be necessary. In addition, European exports continue to grow strongly and the trade-weighted euro has appreciated much more modestly than the euro’s appreciation against the dollar.

The ECB’s rhetoric remains hawkish and it will be reluctant to cut interest rates any time soon, due to the high growth rate of the money supply, but will ultimately be forced to ease policy as the economy softens and if renewed dollar weakness sees the euro rise again.