25% chance of US recession next year: Goldman Sachs

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Pending sales of previously owned US homes rebounded unexpectedly in July and new claims for jobless benefits fell last week, helping quell fears the economy could face a double-dip recession.

But Jim O'Neill of Goldman Sachs believes that the US is facing some challenges and 25% chance of a recession next year is a possibility.

In fact the accomodative financial conditions in the US will become important globally, he said adding that President Barack Obama's stance on the economy and business were influencing the US economy and markets.

Speaking on markets around the world, O'Neill said that German valuations looked attractive and infact Germany had a lot of exposure to the BRICs nations (Brazil, Russia, India and China).

On Indian markets he said that the GDP growth of 8.8% was a big positive and that India was very well positioned among BRIC nations.

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying video.

Q: What is your assessment of how things stand in US and Europe now?

A: I think the US economy is clearly having some challenges. One of the two big surprises of the summer is just how broad the evidence of renewed softness in the US has been, the other being the strength of Germany. Even for ourselves who have generally remained quite cautious about the nature of US recovery, the news is disappointing. I think it is something people have just got used to.

The US for the first half of this decade cannot be the US of past 25 years. The global crisis originated in the US, it is basically a problem of too excessive leverage, over borrowed US consumer and it's going to take many years for it to repay.

The key challenge is to stop the US going to be another recession. I don't think because of the likes of your country, India and the other BRICs, China especially, is as big a deal as people worry about, people are just going to get used to it. It's partly a generational thing. So, many people of my generation are so used to US dominating everything, it is just not going to be the case in quite sometime.

Q: Having said all of this, you are not in the camp, which is calling for a double dip recession, what makes you think we may be able to avert that?

A: This is the really important thing, the transmission mechanism to the rest of the world as we put in this report you have referred to, we think there is a probability not to be dismissed that the US could go back into recession, maybe 25% in the next year. But the most important thing is what happens because of this risk to Fed policy and financial conditions.

The fear that I think many people have around the world is that we could have sort of re-run of 2008, 2009, the US has a recession and the world goes with it. The big difference this time is that the Fed is so alert to the risk, what Bernanke said last week that it is prepared to ease just with some disappointments. That means that financial conditions in the US remaining very accommodative, which is much more important to the rest of the world than the US economy.

In essence US financial markets are more important to world companies and world financial markets, and therefore, the world economy than is the US economy itself. So far at least despite weakness in US, US financial conditions have stayed very accommodative. This is the key.