Greenspan: Economy Will Slow, Stocks Stagnant

Monday, 05 Oct 2009 04:23 PM

By Dan Weil

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Former Federal Reserve Chairman Alan Greenspan expects the U.S. economy to slow down next year, as the huge stock rally peters out.

As for stocks, “the odds are we flatten out,” he told Bloomberg.

“That flattening out will put some sort of dull face on 2010.”

Greenspan forecast that the economy will expand at a 3 to 4 percent annual rate in the next six months before decelerating.

The economy shrank 0.7 percent in the second quarter.

The renewed sluggishness will keep the jobless rate from dropping much below the 9.7 percent level of August, Greenspan said.

Still, he doesn’t foresee the economy falling back into recession.

The inventory cycle will provide buoyancy in coming months, as companies align their stockpiles better with sales, Greenspan maintains.

He also says inflation isn’t a worry yet. “We are still by any measure in a disinflationary environment,” Greenspan declared.

But he acknowledged a risk that inflation will accelerate later on if the Fed fails to reverse its massive monetary stimulus, adding that the central bank’s $2 trillion balance sheet is “not sustainable.”

And, Greenspan’s worried that that political pressure will keep the Fed from necessary tightening.

Economists around the world share some of Greenspan’s concerns.

"The fundamentals have improved. However figures are mostly driven by government and central bank intervention. When this wears off the underlying fragility of the world economy will once again be demonstrated," Philippe Gijsels of BNP Paribas Fortis told Reuters.

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