• Home ::
• Fundamental ::
• Analysis Reports ::
• Global Outlook

• Send
• Print
• Add To

Global Outlook

72b4128d-b929-4229-8a6d-03f399664198

30

4

Economic and Financial Outlook, 2009

Fri, Dec 19 2008, 09:39 GMT
by Allan von Mehren

Danske Bank A/S

Macro and central bank outlook:

• Global: The world economy is currently in its worst recession for decades. We expect the weakness to continue over the coming quarters but for a modest recovery to begin in the middle of 2009. The US should be the first to recover followed by Asia, whereas Euroland will be the laggard (see Global Scenarios, Dec 2008)

• US: The economy will remain in recession through Q1 but the contraction will be milder than the exceptionally sharp drop in activity seen in the current quarter. A fiscal boost is on the cards in H1, which combined with a super boost to real incomes from declining energy prices, will help a recovery get under way. The recovery will nevertheless be relatively moderate by historical standards as the deleveraging in the financial sector, declining home prices and unemployment will continue to weigh on growth through 2009. We do not expect unemployment to stabilise before early 2010, topping at 8.6%. Both headline and core inflation are past their cycle peaks and risks of deflation are rising but remain very limited due to an aggressive policy response. We expect the Fed to keep the Fed funds rate at close to zero throughout 2009 and to continue to conduct full-scale quantitative easing. That could include further purchase of mortgage-backed securities, private sector credit instruments and longer-term treasury bonds.

• Euroland: The economy has slipped into a deep recession which will last until at least mid-2009. Tighter financial conditions and greater uncertainty are reducing demand in both the domestic economy and on export markets. By spring/early summer 2009, the worst should be over as demand should be stimulated by a rapid decline in inflation and a pick-up in the US economy. Furthermore, automatic stabilisers and discretionary fiscal policy responses - although many details remain to be revealed - should stimulate demand. The recovery is expected to be slow and gradual and growth will be below potential way into 2010. Much depends on how the financial crisis unfolds and risks to growth are primarily on the downside. We expect pressure to mount on the ECB to cut rates during the first few months of 2009 and even though the ECB believes that going below 2% would be painful, we think the weak economy will force it to cut the refi rate to 1.5%.

• Japan: The economy has contracted sharply in H2 08 on the back of weak exports and corporate investments. We expect fiscal easing and lower inflation to prevent the economy from contracting further in H1 09. However, the economy will barely grow in H1 09 and there is mainly downside risk to our GDP forecast in early 2009. In H2 the economy should start to improve as the global economy gradually starts to recover. Deflation fears could re-emerge as both headline and core inflation will return into negative territory in 2009. We expect the Bank of Japan to effectively return to some form of quantitative easing by cutting its leading interest rate to 0.1% and possibly even to zero and instead use outright purchase of government bonds and corporate debt as the main monetary transmission mechanism.

• Emerging Markets: The growth outlook for Emerging Markets worsened during 2008, and standing on the brink of 2009 most countries in the Emerging Markets face a couple of quarters with negative growth as global deleveraging continues to put a dampener on Emerging Markets. In CEE and CIS we are most downbeat on the growth outlook, as these regions are the ones where imbalances have grown the most and thus the need for increased savings and reduced spending are the highest - overall we expect zero at best in CEE/CIS. Latin American economies suffer from lower commodity prices and slumping US growth, while Asia should get a boost from lower commodity prices and better external balances. However, in H1 09, Asian growth will slow significantly as industrial production suffers from lower exports. During the last part of 2009, there should be a reasonable chance of a rebound. Good news for Emerging Markets is that inflation falls rapidly, which should open the door for more aggressive monetary easing, but also weaker currencies - mostly in CEE/CIS.

• Download full Global Outlook with charts

Published on  Fri, Dec 19 2008, 09:42 GMT