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Interview: World economy not to suffer double dip: German expert

(Xinhua)

08:24, August 12, 2011

BERLIN, Aug. 11 (Xinhua) -- The world will not suffer a double dip, and the U.S. will keep its current positive but low growth rate in the second half of 2011, Christian Dreger, a top German economist said in an interview.

In an exclusive interview with Xinhua, Dreger, head of Macro Analysis and Forecasting department in German Institute for Economic Research, said rating agency Standard & Poor's downgrade of U.S. credit rating last week came with little surprise.

"Downgrading is not surprising. Standard & Poor's has announced the warning several months ago. So it has quite high chance that the downgrading would happen." Dreger said.

"It depends of course on the recent development of American government debt and the difficulty in the negotiations to increase the debt limit," he said.

As a result, the U.S. will have to pay higher interest rate over a medium term, which would cast negative impacts on the private consumption and private investment, thus dampen the sustainability of the U.S.' recovery and increase the risks of a double dip.

"Considering the U.S. is the major market of the world economy, so it will have a spill-over effect on the world economy." Dreger said.

But he said the downgrading would not have similar impact as the bankruptcy of Lehman Brothers did in 2008, saying "the world economy will not suffer another recession, because the market has expected the downgrade and the U.S. still realizes a positive but low growth rate."

"The interest increase due to the downgrading is also not high, probably half a percentage point," he added.

According to statistics of the U.S. Department of Commerce, the country's growth rate in the second quarter was 1.3 percent on an annual basis, compared with 0.4 percent in the first quarter.

The slow but positive growth rate will continue during the second half of 2011, according to Dreger, adding that in the short run the U.S. monetary policy would be "very expensive."

However, Dreger also expressed his worries about the U.S. recovery, saying it was "quite fragile."

Obama's statement after the U.S. credit rating downgrade did not ease the market panic because the consolidation measures reached by democrats and republicans were not very convincing, Dreger said.

"Some elements are missing. For example, the higher taxes, especially for the wealthiest people. This could improve the budgetary situation in the U.S., but this was missing at all. So I think the consolidation measures were not very convincing. And this should also be the opinion of the market." He said.

Commenting on the slump of stock markets across the world, Dreger said he believed the market had "some overreactions."

He said the heavy losses was caused by the panic in the market, while the sharp extent is "unexpected."

"In my view, the developments of stock market are exaggerated. It will surely rise again after some period. The drop in the stock market is not justified by the fundamental values," he said.

Dreger also did not agree the recent tough criticism against rating agencies from European and American politicians, saying the current dilemma was not a problem caused by the rating agencies, but "the problem that has something to do with the policy makers."

"The reason for the crisis is the high debt burden of the industrious countries and lack of convincing strategy to overcome this debt crisis. So leaders of the U.S. and Europe should display more leadership and take convincing strategy to build market confidence and to get rid of the crisis," he said.

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