US and Europe ‘may be in recession’

The US and much of Europe may already be in recession while demand is dropping sharply in emerging markets, the head of one of the US’s biggest manufacturers has warned.

In an interview with the Financial Times, Tom Linebarger, who will take over as chief executive of Cummins, one of the world’s biggest engine-makers, in January, said he expected the next six to nine months to be a highly uncertain time for the global economy,

“Europe could drive another global recession pretty easily,” he said. “Some of the countries in Europe are already in a second recession or will be shortly. That could get a lot worse.”

“The US is much in the same spot,” Mr Linebarger added. “We’ll find out in three or four months if we’re already in recession but it wouldn’t surprise me to find out that the US is already in negative growth, once all the figures are adjusted, or we’re very close to that. I’m very concerned about that.

“We’re seeing the effect in Europe on our business, though what worries me the most is the effect European problems will have on the rest of the world. The US is already weak. If Europe gets a bad cold, the US will get much sicker.”

The Cummins chief said he was also worried about emerging markets, whose growth has boosted the manufacturer’s bottom line and is expected to make up an increasingly important part of its revenues in coming years. Three-fifths of the company’s revenues come from outside the US.

“In China and India, their economies are doing well but inflation rates are high, so they’re cutting back on demand and raising interest rates to get inflation under control, which is hurting our markets,” he said. “All those things are near-term concerns of mine.”

Cummins is seen as something of an industrial bellwether. Its engines power popular cars such as Chrysler’s Dodge Ram trucks, as well as large mining and construction vehicles, and are widely used in power generation.

Mr Linebarger’s comments contrast with recent data that suggest that the US might avoid economic contraction this year, as well as with Cummins’ own projections for its growth in the next four years. Mr Linebarger explained that those targets were longer term, and that the company did not assume growth would be steady.

“I don’t think the next six to nine months are going to be terrific, but if you look out over four or five years, I think it’s going to be good over that time,” he said. “We’ll be in volatility in different markets at some point over the next four years, but over the period I see significant opportunities for Cummins to grow.”

The manufacturer expects its revenues to increase by an average of 14 per cent a year to 2015, with about half the growth coming from emerging markets.

Mr Linebarger said that would be driven by infrastructure development, tighter emissions restrictions and partnerships with emerging market manufacturers seeking to expand their sales globally.

He said concerns about the reliability of energy supplies in developing countries would also boost Cummins’ power-generation division.