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Top-10 Predictions for 2009

Top-10 Predictions for 2009. Nariman Behravesh, Chief Economist January 21, 2009. 1. 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

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Top-10 Predictions for 2009

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  1. Top-10 Predictions for 2009 Nariman Behravesh, Chief Economist January 21, 2009

  2. 1. 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 • It is also in the running to have the largest peak-to-trough drop in real GDP • The steep back-to-back declines in Q4 and Q1 growth are likely to be near-records as well • The huge November and December payroll losses portray an economy in freefall • Hopes of a mid-2009 turnaround rest on massive fiscal stimulus being put in place quickly

  3. U.S. Real GDP Growth and Unemployment Rates (Annual percent change, 2000 dollars) (Percent)

  4. A Comparison of Peak-to-Trough Declines in Real GDP in U.S. Recessions (Percent change) Baseline Pessimistic

  5. 2. Also One of Worst Downturns for Europe and Japan in Many Decades • Japan, Germany, Ireland, and Italy are already in recession — others will follow them down • The first Eurozone recession will also be one of the worst for most European countries since the end of World War II • For Japan, the downturn will be worse than during the Asia Crisis • Large current account surpluses and relatively high saving rates have not spared Germany and Japan — in fact, reliance on export-led growth is a serious vulnerability • Timid policy responses in the Eurozone and Japan could mean a prolonged slump

  6. The Eurozone’s Economic Growth (Percent change)

  7. Real GDP Growth in Western Europe (Percent change)

  8. Japanese Economic Growth (Percent change, real GDP)

  9. 3. Growth in Emerging Markets Will Decelerate Dramatically • Forget “de-coupling” • Collapsing commodity prices are hurting many emerging economies including Russia, Venezuela, Iran, and South Africa — will the Gulf states be next? • The drying up of global capital flows is also doing a lot of damage, especially to countries with large current account deficits — many of these are in Emerging Europe and some have sought help from the IMF • Contracting world trade will hurt the export powerhouses of Asia • For many emerging markets, 2009 growth will be less than half the rate in 2007

  10. It Is Still a Two-Speed World Economy (Real GDP, percent change)

  11. Current Account Balances of Emerging Markets (Percent of GDP, 2008)

  12. Real GDP Growth in Emerging Europe (Percent change)

  13. Real GDP Growth in South America (Percent change)

  14. Real GDP Growth in the Middle East and Africa (Percent change)

  15. Real GDP Growth in Asia-Pacific Economies (Percent change)

  16. 4. Central Banks Will Keep Cutting Rates • The race to zero is on! • The Fed and the BoJ have pushed rates effectively all the way to zero • Many European central banks have become more aggressive recently, especially the Bank of England and the Bank of Sweden • The European Central Bank has been the most cautious of the bunch, but it too will have to make more big cuts • With few exceptions, almost all central banks are cutting • So far, no other central banks have matched the big and unorthodox moves by the Fed

  17. Policy Interest Rates Have Plunged (Percent)

  18. 5. More Fiscal Stimulus in the Pipeline — Some of It Massive • The in-coming Obama administration is talking about large fiscal stimulus — estimates range from $775 billion to $1 trillion (5.5% to 7% of GDP) to be spread over two to three years • “Permanent” tax cuts, infrastructure spending, extended unemployment benefits, help for state and local governments, and aid directed at housing and autos will likely all be part of the plan • China has also announced a big stimulus package, worth about 14% of GDP over two years — even if only half is “real” is could add 2 percentage points to growth in 2009 • European stimulus proposals (1% to 1.5% of GDP) have been much more timid, so far

  19. A Record U.S. Federal Budget Deficit in Fiscal 2009 (Billions of dollars, fiscal years) (Percent of GDP)

  20. Fiscal Balances Will Deteriorate Across Regions (Federal budget balance, % of GDP)

  21. 6. Commodity Prices Will Remain at Depressed Levels for Much of Next Year • The collapse in commodity prices in a matter of a few months (60% to 80%) has been unprecedented • Further drops are likely, as markets have not fully factored in the depth of the world recession and the very weak growth in emerging markets — demand is being “destroyed” on a very large scale • Oil is headed for less than $40 per barrel and the chances of hitting $30 are rising • Good news: The big drop in oil prices is like a tax cut for oil importing countries — more than $250 billion for U.S. consumers alone — from the decline in gasoline prices

  22. Industrial Materials Prices Plunge from Peaks (IHS Global Insight Indexes, 2002:1=1.0)

  23. A Sharp Retreat in Crude Oil Prices (West Texas Intermediate price, dollars per barrel)

  24. Real Crude Oil Prices Will Recover (U.S. refiners’ acquisition price of imports, $/barrel)

  25. 7. Inflationary Fears Will Be Replaced by Concerns About Deflation • Anxiety about inflation in many parts of the world has evaporated… • …To be replaced by growing fears that the United States and other parts of the world will be gripped by deflation • Headline CPI and PPI inflation will be negative in the United States throughout much of 2009 and core measures of inflation will fall to around 0.5% • Inflationary pressures are likely to be a little more persistent in Europe • China and Japan will see a return of late-1990s-type deflation

  26. Food and Energy Prices Cause a Swing in U.S. Consumer Price Inflation (Year-over-year percent change)

  27. U.S. Core Consumer Inflation Has Risen; Will Fall (Excluding food and energy, percent change from a year earlier)

  28. Consumer Price Inflation Will Subside (Percent change) * Excluding Zimbabwe

  29. 8. Global Imbalances Will Improve Markedly over the Next Couple of Years • The long-awaited correction of the gaping global imbalances is happening — with a vengeance • The U.S. current account deficit in 2009 will be about 40% of the level in 2007 — though some of the improvement will be temporary • The large drop in commodity prices signals a dramatic reversal in the global terms-of-trade and a “re-balancing” of global growth, with commodity-importing countries being the major beneficiaries • Without policies to boost domestic demand in the surplus countries, the improvement in global imbalances may be short lived

  30. The U.S. Current Account Deficit (Billions of dollars) (Percent of GDP)

  31. Global Current Account Imbalances Remain Large (Billions of dollars)

  32. 9. The Dollar Will Remain Relatively Strong as Long as the Financial Crisis Continues • “The best looking horse in the glue factory” • The safe-haven/principal-reserve-currency status of the dollar has trumped all other fears • Also, markets may be signaling greater confidence in the ability of U.S. policy makers to turn the economy around • Nevertheless, once the crisis is over, fundamental forces (e.g., the U.S. current account deficit) are likely to push the dollar back down again • However, a return to the very weak levels of the dollar against the euro and other floating currencies seems unlikely

  33. U.S. Dollar Recovers Briefly (Real Trade-Weighted Dollar Index, 2000=1.0)

  34. U.S. Dollar Exchange Rates Near Parity with the Canadian Dollar Limited Recovery Against the Euro (Canadian dollars per U.S. dollar, quarterly averages) (Euro per U.S. dollar, quarterly averages) Falling Against China’s Renminbi Depreciation Against Japanese Yen (Yen per U.S. dollar, quarterly averages) (Yuan per U.S. dollar, quarterly averages)

  35. 10. The Single Biggest Risk Facing the U.S. and Global Economies Is a Timid Policy Response • Given the expected depth of this recession, the policy response need to be big, bold, and swift • The good news is that the United States and China understand this challenge • The bad news is that Europe, Japan, and some countries in the emerging world are taking a more cautious approach • Prolonged slumps in some of the world’s key economies could not only result in a much worse global recession, but the ensuing recovery could also be very weak

  36. U.S. Real GDP Growth in Alternative Scenarios (Percent change, annual rate)

  37. Risk Associated with a Timid Policy Response to the Crisis (World GDP Growth)

  38. Thank you! Nariman Behravesh nariman.behravesh@ihsglobalinsight.com

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