UBS Sees Sharp US Economic Slowdown

[CVX]

PARIS (Reuters) - High oil prices and shaky consumer confidence after Hurricane Katrina could sharply reduce U.S. economic growth by the end of next year, a strategist at UBS Wealth Management said on Thursday.



Andreas Hofert, the firm's head of global investment recommendations, also believes that a deceleration of property price rises brought on by Federal Reserve tightening could erode consumption, the driver of the world's biggest economy.



This has left the firm neutral on equities and bonds and generally favouring cash.



"2006 should be a year of transition for the United States, with a pronounced weakening of the economic situation," Hofert said, projecting U.S. gross domestic product growth to slow to 3 percent in 2006 and even below that at the start of 2007.



"The main reason for this is oil prices which are now at levels comparable with those of the first oil shock in 1973-1974, and Hurricane Katrina has not helped, causing a drop in consumer confidence that is nearly as important as after September 11."



Oil prices above $60 a barrel have made core inflation an issue in the United States, Hofert said, estimating that the Fed would respond to this situation by raising interest rates by another 75 basis points between now and January.



The situation in Europe is different as economic growth is expected to pick up modestly in 2006 -- to 2.4 percent in Britain and 1.6 percent in the euro zone -- after this year's slight deceleration.



STOCKS AND BONDS



Within the euro zone, UBS favours Germany, where it believes the new coalition government will carry on the economic and labour reforms initiated by Chancellor Gerhard Schroeder.



But this does not make Hofert more bullish on European equities -- partly because he expects the euro to resume its upward trend against the dollar, which would hurt euro zone exporters.



"We recommend cash, showing that we are not mad about equities and that we don't like bonds," Hofert said, adding that bonds remain relatively expensive.