Bermuda investment company LOM Asset Management Ltd. yesterday predicted economic growth will slow in the US this year, while China’s economy will continue to expand at a rapid rate.

The company’s Investment Policy Committee yesterday suggested that increasing defaults on mortgages amid a flat housing market would have a negative impact on the US economy, limiting it to 2.0 to 2.5 percent growth, while the European and Japanese economies would both grow at a slightly faster rate.

“A lacklustre housing market will continue to threaten consumer spending as adjustable rate mortgages will reset at higher interest rates in 2007,” LOM said in its summary of the US economy in 2007.

“Many banks (including HSBC) are provisioning for massive defaults which would have a negative ‘trickle-down effect’ on the entire US economy. We feel that although this ‘subprime’ portion of the mortgage market does not represent a majority, the negative tone it sets will adversely affect the broader equity and credit markets.

“We do not anticipate The Federal Reserve will lower the base rate until late 2007 early 2008.”

In her Budget statement earlier this month, Finance Minister Paula Cox also predicted a slower rate of global growth, particularly in the US. And she added the deceleration in the US economy could help to counteract inflationary pressures in Bermuda’s own booming economy, because of the close economic links between the two.

LOM believes that China’s Gross Domestic Product (GDP) will continue to grow at a “torrid pace”. Although it warns investors that a slowdown in investment activity will probably bring the rate of increase down from double digits to between 8.5 and 9.0 percent.

“Although both the government and the central bank would like to slow this pace slightly, the fact remains that a pegged Yuan will prohibit this from happening,” Lom said.

“Despite this dramatic slowing in Chinese investment activity (from 30 percent to 14 percent), most still believe nothing can stop China’s rapid growth.

“However, it is important to point out that investment activity made up over 45 percent of the overall GDP in 2006. This being the case, it is hard to argue that this slowdown will not affect the broader economy.”

Further interest rates are likely to come from the European Central Bank (ECB), LOM said, as the Euro zone countries’ economies continue to expand at a rate of between 2.5 and 2.8 percent, led by robust German output. To keep inflation in check, the ECB is likely to raise base rates by 0.25 to 0.50 percent.

“The extent of this move will depend heavily on the strength of the Euro versus the US Dollar,” LOM said. “If the exchange rate goes through 1.35, the ECB will be forced to leave rates unchanged.”

LOM believes Japan’s GDP will grow at a similar rate to that of the Euro zone, but that no interest rates are likely in the first half of 2007, following this month’s hike from 0.25 to 0.50 percent — the first increase since last July.