FYI | Mar 24 2009
By Andrew Nelson
By now I think we’re pretty much all agreed that the global economy is at its ugliest crossroads since the 1930s as GDP around the world continues to decline. But this time around a concerted push of massive stimulus is expected to lead to a gradual improvement, which should begin to bear fruit in the US and Asia in the second half of this year before spreading to Europe over the course of 2010.
We’ll know for sure if global leading indicators begin to rise again over the next six months.
The US economy will likely remain in recession for a while yet, predicts Danske Bank chief analyst Allan von Mehren, who points out the effects of continued deleveraging, wealth destruction and credit tightening, in conjunction with negative economic conditions such as sky rocketing unemployment and business de-stocking will likely keep growth rates negative for the next two months at least.
However, sometime towards the middle of 2009 the much hoped for and stabilising benefits of government intervention and stimulus are expected to begin to be felt. Von Mehren assumes that of the first moderating factors will probably be a slowing in the pace of credit tightening. This, combined with a meaningful boost to incomes from lower commodity prices, fiscal policy easing, lower mortgage rates and slower business de-stocking, should help start the recovery process.
Danske is projecting GDP growth at minus 2.7% in 2009, which should pick up to a more workable 2.5% in 2010, although the bank doesn’t expect unemployment to stabilise before early 2010 and topping out at 9.4%. Von Mehren admits that the risks of deflation is certainly rising, but believes such risks are limited due to what has been forceful policy response the world over. Ultimately, Von Mehren sees the Fed keeping policy rates unchanged at a close-to-zero level for quite some time to come while the central bank continues the expansion of its balance sheet as long as the credit markets remain grid-locked.
Europe is a slightly different story, as the collective economies of the old world still remain in free-fall mode. Exports continue to fall dramatically as a result of the slump in global demand, while credit tightening and falling capacity utilisation is putting the mockers on investment. On top of that, a dire combination of collapsing housing bubbles and decreasing job security is strangling private consumption and overall personal and business expenditure.
The good news here is that Danske Bank also expects the speed of Europe’s continuing decline to soon begin to taper off. This, at least in part, will be driven by a rebound in exports and non-residential investments once the US and Asia begin to stabilise. However, the bank still expects Euroland GDP to shrink for most of 2009 and does not expect any sort of positive momentum to begin until at least Q409, or later. At that point, thinks Von Mehren, is when we are likely to begin to see a gradual recovery, with growth reaching normal trends about a year afterwards.
This leads Danske to forecast the ECB will make a final 50bp rate cut in April, bringing the refi rate to 1.0%. After this, the ECB will likely engage in some credit easing. All up, Danske believes the Euroland economy will shrink by 2.7% this year and then grow by a moderate 0.8% in 2010.
The short-term outlook for Japan is even more dire, with Danske expecting GDP to contract by a soul shattering 5%. The main reasons for this extraordinary weakness, notes Von Mehren, is the island nation’s utter dependence on exports of highly cyclical manufacturing goods coupled with a fairly lacklustre fiscal and monetary response to the ongoing crisis. This leads to his expectation for the Japanese economy to bottom out at very depressed levels in Q209 before beginning to recover slightly in the second half, when the impact of some belated fiscal easing should start. Also helping will be an expected, if not subdued rebound in global trade.
However, any sort of sustainable recovery in 2010 depends wholly on a sustained recovery in global growth next year. With Japan entering dangerous deflationary territory, with fiscal policy being constrained by political uncertainty, Von Mehren thinks there is likely to be increasing pressure on the Bank of Japan (BoJ) to step up quantitative easing, including increasing the purchase of government and corporate bonds. This leads Danske to forecast the BoJ will not lift its leading interest rate any time before H210.
Emerging market growth is unsurprisingly doing it just as tough and has slowed sharply as anywhere else in the world. Still, Von Mehren expects to see some signs of stabilisation beginning to emerge some time in the next quarter, although from some very depressed levels. He then expects to see a slight recovery begin in H209, but believes much like everywhere else, it wont be until 2010 before any sort of recovery gains a solid footing.
Much like everyone else, Von Mehren expects China will be the first to recover. In fact, he points out the Chinese economy is already showing signs of improvement. This leads Danske to expect a sharp turnaround in H209.
On the other hand, the recovery in Central and Eastern Europe will be a longer and more drawn out affair. It will probably stretch out to be one of the most protracted of all of the emerging markets. With euroland doing it tough because of all of the money it has lent out and is not getting back from this part of Europe, getting access to external financing will become much more difficult.
All emerging markets also suffer from a more conservative and risk averse investment market in the years to come, predicts Von Mehren. But lingering questions about the political status quo in many of these Central and Eastern Europe countries means the perception of considerable downside event risk will remain and this will also discourage new investment, at least in the short-term.
While monetary conditions have been eased aggressively in recent months, as inflation dropped rapidly because of the global economic downturn, these monetary easing cycles are pretty much coming to an end, especially in Central and Eastern Europe. On the other hand, there is a little more room for easing in Latin America and Asia going forward.
All in all, though, Von Mehren concludes that 2009 will probably be very busy year for the IMF.
