The world’s largest economy may suffer a recession after it moves from “highly stimulative” to “strongly restrictive” economic policy later in 2011, according to the firm, which is holding a seminar on the topic on May 10.
This is then set to be reinforced by the “granting of 100% first-year depreciation for 2011 only, creating a powerful boom-bust dynamic”.
Diana Choyleva, a director at Lombard Street, will also speak at the seminar on the subject of China’s boom-bust scenario, which she says is likely to be reinforced by America’s behaviour.
China’s current overheating may be a sign of “a fundamental change in China’s growth model”, says Choyleva. She predicts China’s growth will average at most 5% a year on average for the next decade.
Opinion is now divided as to whether China can maintain its current rate of growth in the face of rising inflation, a massive wave of new credit and soaring property prices. An American slowdown would additionally hit China’s key export industries.
China has amassed close to $3 trillion (£1.8 trillion) in reserves, including large holdings in American government debt, that could cushion against such a scenario.
However, although China could divert money into its economy and away from American debt in an emergency, this would most likely only hurt America even further.