Invesco's Greenwood warns of US economic downturn

Invesco's Greenwood warns of US economic downturn

Higher interest rates at a time when banks are reducing the pace at which they lend money into the economy means there is a "significant risk" of a downturn in the US, according to John Greenwood, chief economist at Invesco Perpetual.

Mr Greenwood said rate of growth of money and credit in the US economy has halved over the past year.

This would be expected to slow down the level of GDP growth in the economy, as, if the supply of money is growing at a slower pace, then the price of money, i.e. interest rates, rise.

This encourages people to save more and borrow less, reducing the level of demand in the economy and negatively impacting GDP, he said.

The US Federal Reserve, the country’s central bank, has been putting interest rates up with the aim of slowing down the supply of money, as it feared inflation would rise and lead to a collapse.

Mr Greenwood said with money supply growth already having halved and more US interest rate rises to be implemented by the central bank this year, there is a significant chance of a downturn.

Ian Williams, economic analyst at Peel Hunt, said inflation is starting to rise at a faster rate in the US, and such a scenario justifies further interest rate rises.

John Ferguson, an analyst at the Economist Intelligence Unit in London, said he expects a US recession by 2020 as higher interest rates pushes the economy into a downturn.

Luca Paolini, chief strategist at Pictet, said US equities are "overvalued" but added he does not expect any major economic crisis.