10 Predictions for the Global Economy 17 comments
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Nariman Behravesh, chief economist at IHS Global Insight whom I recently interviewed about his new book, today issues his predictions for 2009. They are not pleasant:
- The U.S. Recession Will Be One of the Deepest—if not the Deepest— in the Postwar Period. The current downturn is well on its way to becoming the longest in the past six decades. Based on the December IHS Global Insight baseline forecast for the U.S. economy, it will be the fourth deepest in the postwar period (the 1957 recession was the deepest, followed by the contractions of 1973–75 and 1981–82). Nevertheless, given the very negative tone of the incoming data (including the 533,000 drop in November payrolls), the recession could well be the worst in the postwar period. At the same time, the large back-to-back declines in real GDP predicted for the fourth quarter of 2008 and the first quarter of 2009 (down 5.0% and 3.8%, respectively) are the worst since the 1982 recession, and may easily be the worst in more than six decades. Overall, we expect the U.S. economy to shrink at least 1.8% in 2009.
- The Downturn Will Be the Worst in Europe over a Couple of Decades and the Worst in Japan Since 1998. Japan and some European countries (Ireland, Italy, and Germany) are already officially in a recession. The other economies of the European Union will follow them down. For Europe, this will be the biggest economic contraction since the early 1990s—and the first for the Eurozone. For Japan, it will be the nastiest recession since the depths of the Asian crisis in 1998, when its economy contracted 2.1%. In 2009, IHS Global Insight expects respective GDP declines of 1.0%, 1.3%, and 1.8% for the Eurozone, Japan, and the United Kingdom.
- Growth in Emerging Markets Will Decelerate Dramatically. The global scope of the current economic crisis has put to rest the notion that emerging markets have "de-coupled" from the economies of the developed world (something to which IHS Global Insight never subscribed). There are at least three transmission mechanisms to the emerging world: 1) the collapse in commodity prices, which is already hurting the oil- and commodity-exporting countries (e.g., Russia, Iran, Venezuela, and South Africa); 2) the drying-up of capital flows, which is harming economies with large current-account deficits (e.g., many countries in Emerging Europe, some of which have already sought help from the IMF); and 3) the precipitous decline in world trade, which will damage growth prospects for the major exporting countries (almost all of which are in Asia). As a result, GDP growth in most emerging markets during 2009 will be roughly half the rate of 2007 and early 2008. For example, the Chinese economy, which enjoyed 11.9% growth in 2007, is likely to expand only 6.9% in 2009.
- The Federal Reserve and Other Central Banks Will Keep Cutting Rates. The race to zero is on! The Fed has already cut the federal funds rate to 1% and is likely to take it all the way to zero by the end of January. Once the overnight rate is at zero, the Fed may have to engage in "quantitative easing" (direct purchases of long-term Treasuries). It is already engaging (massively) in unorthodox measures such as buying commercial paper, mortgage-backed securities, credit card debt, and loans to small businesses, students, and car buyers. On December 4, the European Central bank joined the fray by cutting the overnight rate by 75 basis points (to 2.5%), while the Bank of England cut by 100 basis points (to 2.0%). IHS Global Insight now believes that the ECB and BoE will push rates all the way to 1.0% and 0.5%, respectively—and could cut all the way to zero. Most central banks around the world have followed suit. Notably, on November 26, the People's Bank of China lowered rates by 108 basis points, the largest cut in 11 years and the fourth cut since mid-September.
- More Fiscal Stimulus in the Pipeline. The incoming Obama administration has been talking about a fiscal-stimulus package of between $500 billion and $700 billion (or between 3% and 5% of GDP). Our December baseline forecast assumes a package of $550 billion, which consists of tax cuts, infrastructure spending, and other provisions. Given how quickly the economy is deteriorating, the fiscal package is likely to end up much bigger than current estimates. The only other country that is considering a big stimulus program is China, which has announced a two-year program worth about $586 billion (or 16% of GDP). Even if only half of this is "real," it would add substantially to growth. Without it, we estimate that Chinese GDP growth would only be 5%. The fiscal-stimulus plans announced for other major economies are much smaller. In particular, the plans being discussed for the United Kingdom and the Eurozone are only between 1.0% and 1.5% of GDP.
- Commodity Prices Will Remain at Depressed Levels for Much of Next Year. The steep collapse of commodity prices over the past few months (60–80%) has been unprecedented—and the worst is probably yet to come. With the economic outlook deteriorating by the day, futures markets for commodities have not priced in the full extent of the "demand destruction" taking place. IHS Global Insight now believes that oil prices will (easily) fall below $40 per barrel in the next year, and could tumble all the way to $30. The good news is that the drop in energy prices is like a tax cut for households and businesses. In the United States, the drop in gasoline prices is, so far, the equivalent of a $230-billion tax cut.
- Inflationary Fears Will Be Replaced by Concerns About Deflation. Only a few months ago, there was a lot of hand wringing over inflation. Such fears have evaporated, and concerns about deflation are on the rise. IHS Global Insight now expects that headline consumer and producer price inflation will remain in negative territory through next summer. For calendar-year 2009, headline CPI and PPI will fall 1.5% and 6.3%, respectively. At the same time, core inflation will fall from a little over 2% to just over 1%. A similar, though perhaps less-pronounced, pattern will be evident in Europe. Japan, which barely shrugged off deflation, is likely to suffer a relapse. At the same time, fears about overheating in China have given way to the possibility that deflation will rear its ugly head again.
- Global Imbalances Will Improve Markedly. The long-awaited correction of the gaping global imbalances is happening with a vengeance. The U.S. current-account deficit, which was $731 billion in 2007 and likely to come in at $660 billion this year, will plummet to $282 billion in 2009. The large deficits in the past two years belie a significant improvement in the non-oil deficit—which was, nevertheless, overwhelmed by the sharp rise in the oil import bill. With the collapse in oil prices, the current-account deficit will plummet about 50%, both in absolute terms and as a share of GDP. The big drop in commodity prices also signals a major shift in the terms of trade, in favor of the developed economies, and represents a "re-balancing" of growth and current-account deficits, with commodity-importing countries being the major beneficiaries.
- The Dollar Will Remain Relatively Strong as Long as the Financial Crisis Continues. The joke is that the dollar is the "best-looking horse in the glue factory." This means that in the midst of the ongoing crisis, the safe-haven/principal-reserve-currency status of the U.S. dollar has trumped all other fears. As long as the crisis continues, the dollar is likely to remain strong. Moreover, the markets seem to have a little more confidence that the United States may be able to pull out of its recession sooner and faster than other parts of the world. That said, once the crisis is over, the downward pressures on the dollar are likely to return. For example, the euro/dollar rate will probably stay at its early-December levels of $1.26–1.28 for some time (and may even strengthen a little), before very gradually appreciating to the low $1.30s by the end of next year.
- The Single-Biggest Risk Facing the U.S. and World Economies Is a Timid Response to the Crisis. The policy response to this crisis needs to be big, bold, and rapid. The good news is that both the United States and China are taking the crisis very seriously. The not-so-good news is that the policy responses in other large economies, especially Japan and Eurozone, seem to be much more timid. This could well mean deeper and longer recessions in those countries, which could mean even weaker world growth in 2009.
A few thoughts for investors: If oil goes to $30, forget about alternative energy investing. It'll take some momentous willpower by governments around the world to support clean energy spending while the global economy muddles through a bad recession. Maybe they'll come through, but it's hard to see how demand will hold among users if energy stays cheap for more than even a few months.
As for China, that 5 percent growth number excluding government stimulus is a scary one because it's likely not enough to keep job growth happening there at a time when China's leaders are increasingly focused on creating jobs and boosting domestic demand to offset falling exports. China's economy is one domino left standing in this crisis, and a deep downturn there would have global consequences.
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This article has 17 comments:
I believe the author had omitted the possible effects of the coming tidal waves of meltdowns: commercial real estates foreclosures, credit card defaults, rising unemployment, state and local government budget shortfalls, baby boomers retirement onslaught and ensuing drain on Social Security and Medicare, hyper federal budget deficits, among others.
As a cliche: "The Future is Unknown", "What can go wrong probably could go wrong (at the same time)"
''There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know''
Greetings to you all !
However, you might consider that you are far more optimistic than reality. There is a much deeper conflict that is completely ignored...
There is no more money into the hands that need it and income distribution is utterly catastrophic. No jobs, no improvement -- only far worse as conditions deteriorate.
End of the world BBQ at my house Dec. 21st, 2012. You are all invited and if you see JC or Edgar Casey tell them to bring cups and napkins.
In summary:
- Banking and Finance is going to be the mainstream income generating sector for the US in the next 2 or more decades. The present financial crisis of the west is going to be solved thru rebalancing and the "magic" of accounting since they are only paper assets not hard assets.
- The developing countries are going to allocate more capital into hard assets of industrialization and maintain their leadership in global manufacturing and will start usurping the technological lead from the US if not already done so.
- China, India, Brazil and other developing countries now do have a "new" baby boomer population dwarfing the the baby boomers of the West by the BILLIONS! (or rather more than 1 billion). They are now in their 20's, 30's and 40's while the Western baby boomers are now in their 50's and 60's. Priorities in life change as the population age changes and so thus the economy of the respective countries.
- The billion(s) of young and productive baby boomers from the developing countries will usher the next global boom in consumerism.
The US is going to maintain its global leadership thru politics and the superbanks (JPM, BAC, WFC and Citi).
Health care will be the economic backbone of the USA 30 to 50 years from now.
To see the highest probability scenario for Dow Jones next year. See my comments last Oct and Nov 2008 from the technical point of view (charting) using Elliott Waves analysis.
I'm not familiar with every single commodity out there, but I know a lot of industrial metals are selling below the costs of production. That situation can not continue as people will not continue to produce a metal they can not turn a profit on. Hence, supply decreases and prices go back up.
Re 9 -- have you not been watching the rise of gold the last two weeks, and the breakdown of the dollar? If the dollar breaks through its July support...game over!!
A lot of interesting stuff is being written by perma-bears or value investors over the last 2 months who are getting bullish... not market cheerleaders but guys who warned off excesses for years.
posted some of the materials on my site, if interested.
These comments, plus the ridiculous 2009 S&P projections from the major market strategists (see article on home page for details) strongly suggest that there are too many people who think that worst is behind us. Those folks seem to ignore (or be ignorant of) the enormous crisis in Alt-A mortgages that has not yet hit, irrationally high S&P earnings projections and an absolutely devastated state of emerging economies (or maybe you believe the Chinese government's reported 8% economic growth statistics...). See you at the bottom.
6.8 is some thing for Brazil!