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Global Scenarios: Trends and risks

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Depression fears running rampant

Fri, Nov 28 2008, 11:04 GMT
by Danske Research Team

Danske Bank A/S

Contents

Introduction: Recession – not a depression

Alternative 1: Policy failure

Alternative 2: Quick recovery

US: More pain and a slow cure

Euroland: Worse to come before slow revival

Japan: Deflation back on the agenda

Emerging Markets: Vulnerable in the short run

Commodities: Supply under pressure

Introduction: Recession – not a depression

- The shock from rising commodities, a deepening of the housing slowdown and an intensification of the credit crisis has brought the global economy to its knees over the summer. The global economy is now in a severe recession. In financial markets, the toxic flow of news over past months has taken its toll. Risky asset markets are now factoring in an unusually long and deep global recession.

- In the coming three to six months the economies are expected to continue to contract as the negative impact from the credit crisis, a further deepening of the housing slowdown, a backlash in Emerging Mar - kets, and the negative recession dynamics, already in train, dominate.

- By mid-2009 the economies are expected to return to positive growth rates and a subsequent slow recovery will materialise during H2 next year. This scenario assumes that the authorities succeed in unfreezing the credit markets, such that the positive effects from falling energy prices, monetary policy easing, and fiscal stimuli, already in pipeline, are al lowed to work.

- Global headline inflation is expected to fall dramatically over the coming months as a result of the implosion in commodity prices. In some countries a short period of headline deflation is expected in H1 next year. The sharp drop in inflation, falling asset prices and the credit crunch has ignited fear of a deflationary spiral. Although the ingredients for such an outcome are currently present, the risk of per - manent deflation is rather limited because of the aggressive measures taken by the authorities.

- Policy easing is expected to continue in the coming three to six months as central banks ensure against a deeper downturn and the risks of deflationary outcomes. The Federal Reserve is expected to implement Zero Interest Rate Policy by January and expand its quantitative measures. The ECB is expected to cut aggressively to 1.5% by March next year. The Bank of Japan will take interest rates close to zero by easing to 0.1% Q2 next year. Monetary policy in emerging markets is expected to be eased further as well.

- Given the very negative scenario currently incorporated in financial markets our main scenario – although soft – will turn out as a positive surprise if materialising. Hence, we now see long-term value in equity and credit markets. In the short-term, though, financial volatility will remain high. Bond yields are expected to drift lower, as the economies have to pull through several more months of contraction forcing further accommodation from the central banks.

• Download full Global Scenarios with charts - Part I
• Download full Global Scenarios with charts - Part II

Published on  Fri, Nov 28 2008, 11:04 GMT