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Global Scenarios: Trends and risks

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US will temporarily flirt with recesssion over the next couple of quarters

Thu, Dec 6 2007, 11:19 GMT
by Danske Research Team

Danske Bank A/S

Trends and risks

• • The credit crisis has worsened lately
• - but global growth will only slow a little over the coming year
• • US will temporarily flirt with recesssion over the next couple of quarters
• - but the economy will recover during H2-2008
• • Euroland is headed for a soft landing
• - but will see a period of subdued growth by mid-2008
• • Emerging markets will continue to decouple
• - growth will only moderate a little as Asia still shines
• • Federal Reserve will ease policy further during H1-2008
• - with ECB and BoJ on hold for a long period

Contents

Introduction More slowing ahead
USA Slowdown
Euroland Moderate growth ahead
Japan Worse before it gets better
Emerging Markets Decoupling
Alternative 1 Debt deflation
Alternative 2 Only a financial crisis

Introduction: More slowing ahead

• • The signs of stabilisation on financial markets during October proved to be only temporary, and a second wave of the credit crisis hit us during November. The length and dynamics of the crisis is still very uncertain. We believe that we are facing several more months before calm return to markets.
• • So far, the crisis has pushed business confidence and production down in USA and Euroland a little more than expected. These sentiment effects rarely last long, and dependent on the dynamics of the credit crisis, business confidence could enjoy a short-lived rebound at the beginning of 2008. Indeed the strength of the industrial cycle is evident in continued strong global trade growth and underlined by continued strong industrial production, in particular in emerging markets.
• • At the same time, however, we expect final global demand to gear down somewhat, especially in the US, where the risk of a recession is elevated. The rising oil price along with a likely pick up in US savings rate and tighter credit conditions will dampen US private demand growth. In Euroland, tighter financing conditions will weigh on investments during 2008, and due to the oil price, consumer demand will not off set this moderation.
• • Eventually this is likely to generate some undershooting in business confidence indicators by spring or summer, where we will probably see some fairly gloomy readings. But we expect improved global growth during H2-2008, as the US housing market stabilises and as business confidence rebounds.
• • During 2008 Euroland will end its decoupling vis-à-vis USA implying a risk of a hard landing during H2- 2008. However, emerging markets will not slow much, and they are likely to continue to decouple. The strength of emerging markets will not be an unambiguous advantage to USA and Europe, as upward pressures on commodity prices and consumer prices will continue to dampen the appetite of Western central banks to ease policy.
• • With growth likely to be moderate in both Euroland and USA for the most of 2008 we expect the Fed to ease policy by in total 75bp. In Euroland, the ECB is likely to be on hold. The moderation of growth may be more a temporary slowdown than a longer lasting period of subdued growth. We do not believe the western economies are heading into a recessionary growth path.

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Published on  Thu, Dec 6 2007, 11:34 GMT