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Global Scenarios: Trends and risks

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In the US a recession may be imminent or already unfolding

Wed, Mar 19 2008, 10:48 GMT
by Danske Research Team

Danske Bank A/S

Trends and risks

• • The financial crisis has continued to widen
  

- and is now taking its toll on the global economy

• • In the US a recession may be imminent or already unfolding
  

- but the economy will stabilise in H2 as fiscal and monetary stimuli kick in

• • In Euroland growth will be slowing below trend
  

- but a recession will be avoided • Emerging markets will continue to outperform - although growth will be slower

• • The Federal Reserve will ease further in H1
  

- with the ECB following suit by mid-year

Contents

Introduction: A stagflationary rebalancing

USA: More slowing and downside risk 8

Euroland: Headwinds are picking up 13

Japan: Still dependent on exports 18

Emerging Markets: From backseat to driver 21 Global

Introduction: A stagflationary rebalancing

• • The financial crisis continues to worsen. Some investors and financial institutions are now facing significant losses. In many countries credit is being tightened, as banks are forced to consolidate their balance sheets. For now, the length and the dynamics of the crisis remain very uncertain. Most likely there will be several more months of negative news including a possible further worsening of financial conditions.
  

• • In the developed countries the financial crisis is now taking its toll on the economies. In combination with higher energy & food prices and – in most countries – a slowing housing market, domestic demand is under considerable pressure. In the US a recession may be imminent or is already unfolding. Euroland and Japan are also set for further, but more orderly, slowing to below trend growth. This also reflects headwinds from stronger currencies to some extent.
  

• • Despite some slowing, Emerging Markets (excluding CEE) will remain the bright spot of the world economy. In this part of the world the expansion has become increasingly self-propelling and many countries are benefitting from rising energy and commodity prices via notable terms-of-trade improvements. With the combo of high inflation and continued decoupling in large parts of the Emerging Markets the world economy has entered a phase of a stagflationary rebalancing.
  

• • With the larger parts of the Emerging Markets set to hold up, global growth will slow only to around trend. Consequently, only little slack is likely to develop in the global commodity markets. Overall the outlook is for stabilisation in commodity prices during 2008, which will bring down headline inflation gradually into next year.

• • The initial policy responses to the financial turmoil and the slowing growth have been very asymmetric. While the Federal Reserve prefers super-front-loaded monetary easing, the ECB has remained on hold. This situation is set to prevail for a while, with the Fed ending its easing cycle at 1.50% by June. Hence, the monetary picture is expected to reverse by mid-year, as the ECB will launch an easing cycle by June, which will take the ECB rate to 3.25% by year end.

• • In the Emerging Markets, central banks will remain focused on fighting inflation in the short term, but might lean toward easing later in the year. In this part of the world, the primary source of economic stimuli is likely to arise from fiscal easing.

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Published on  Wed, Mar 19 2008, 11:07 GMT




Archive

• Depression fears running rampant
  Published On Fri, Nov 28 2008, 11:04 GMT
• At brink of global recession
  Published On Wed, Sep 24 2008, 07:47 GMT
• Stagflation light
  Published On Wed, Jul 2 2008, 10:14 GMT
• In the US a recession may be imminent or already unfolding
  Published On Wed, Mar 19 2008, 10:48 GMT
• US will temporarily flirt with recesssion over the next couple of quarters
  Published On Thu, Dec 6 2007, 11:19 GMT

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