Recession a big worry but not likely: Moody's

NEW YORK (CNNMoney.com) -- Despite the subprime mortgage crisis and the rising risk of a recession, a recession isn't likely under current conditions, credit ratings agency Moody's said in a report Friday.

The diversity of the U.S. economy and the global role of the dollar continue to support U.S. government bond and foreign currency ratings, according to the rating agency's annual U.S. credit analysis.

The dollar is expected to contribute positively to economic growth in 2008 as its declining value increases the value of U.S. assets abroad. But in 2007, due to a temporary slowing of the economy in the first quarter and an expected slowdown in the fourth, annual GDP growth is now estimated at 2 percent, down from 3.3 percent in 2006, Moody's reported.

And the 2008 outlook is far from rosy.

Slower employment growth, housing sector problems and subprime worries will continue to subdue overall growth, with housing having the biggest impact. "In 2008, the risk of an outright recession appears to be increasing, although this is not yet the mainstream scenario." Moody's said. If home prices, consumer confidence and spending do continue to sink, the economy could see negative growth in the first half of 2008.

Construction is slowing and home prices are falling. "This means that not only will residential construction be falling, directly affecting GDP growth, but the wealth effect of lower house prices is likely to lead to a drop in consumption growth."

"It is expected that, despite federal government efforts to convince lenders to freeze interest rates on some mortgages where they are set to increase, home foreclosures will rise in 2008, further exacerbating the problem," the agency added.

U.S. government bond ratings should remain stable however, thanks to modest federal debt levels.

The United States reported a smaller than expected federal deficit, at $248 billion, or 1.2 percent of GDP, for the fiscal year ending Sept. 30, considerably less than the 1.9 percent of GDP previously estimated.

And despite the projected deficits for the next few years, Moody's believes that U.S. government debt levels in relationship to the size of the overall economy will remain consistent with its Aaa rating.