● Slippery slope. Europe is sliding ever deeper into recession. Leading and sentiment indicators are in free fall, final demand and production are plummeting. All major EMU economies are affected. A return to growth should not be anticipated before the end of next year. In 2009, EMU-wide GDP will contract by 1¼% – possibly the strongest decline in post-war history (pages 2-4 & chart below).
● Plummeting inflation. The ever-widening output gap in conjunction with the massive pullback in the price of oil means that inflation is melting like ice in the sun. Next summer, headline rates will approach the zero level. A full-blown deflationary spiral is, however, not in the cards, since by then the fiscal and monetary policy impulses, which have not yet been exhausted, should halt the economic downturn (pages 5-10).
● ECB. That creates additional scope for the ECB. Alongside its massive infusions of liquidity, it has now adopted a more aggressive stance on interest rates. At the middle of next year, we now expect a refi rate of 1%, down from the current 2.50%.
● BoE. By mid-2009, the UK central bank should have lowered the repo rate to even 0.5%. The severe housing and banking crisis highlights that the growth risks are more pronounced than in Continental Europe. The same holds true for the danger of deflation (pages 11-13).
● Further topics:
- Fed to cut target rate a further 50 basis points (page 14).
- Data outlook: Ifo to remain depressed; US leading indicators point to a protracted recession (page 16).
- Market outlook: Bonds to stay in demand, recent EUR-USD gains to be trimmed again (page 24).
