America sneezes, the world catches a cold

If America sneezes, does the world still catch a cold? The question remains but the reality is positive. The world economy is in the fragile state and stock market turmoil.

The US economy has been hit by rising mortgage defaults by "subprime" customers who were issued loans during the last housing boom despite patchy credit histories.

Subprime credit woes and a housing slump have added to investor concerns that the US economy will shrink in the months ahead.

The US equity markets were in trouble and the immediate signs are the whole world equities lost steam with European stock markets turning lower despite bumper gains in Asia and after the European Central Bank hinted it was not about to cut euro zone interest rates.

Wednesday's Asia gains came on the heels of the first unscheduled interest rate cut by the Fed since just after the September 11, 2001 attacks in the United States, as the US central bank moved to stop a global markets rout.

But there were immediate signs that the cut might not be enough to restore investor confidence, which has been badly shaken by worries about the longer-term health of the US economy.

Traders and analysts remain on red alert over the health of the United States economy, which is the world's richest.

“They are still concerns around a potential US recession, there are also concerns around a potential UK slowdown," Hunter said, adding that the FTSE 100 was down by 10 percent in value so far this year.

"The other thing to add into the mix is the continuing fallout from the US subprime crisis."

With the fragile state of the world economy and stock market turmoil, the 38th annual Davos World Economic Forum opened Wednesday; at the time the global economy grappled with huge slides in stock markets, fears of a US recession and rising oil, food and other commodity prices.

In recent years the annual meeting in the Swiss ski resort has been held against a backdrop of bumper corporate profits, strong economic growth and tame inflation.

The agenda for the event reflected the prevailing mood, with debates on "planning for a global recession".

"The US not just going to sneeze and have a cold, it is going to have a protracted period of pneumonia," New York University economics professor Nouriel Roubini told delegates in a packed opening debate that featured a flurry of recession warnings and downbeat forecasts.