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Global Scenarios: Trends and risks

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At brink of global recession

Wed, Sep 24 2008, 07:47 GMT
by Danske Research Team

Danske Bank A/S

•  Global economy on the brink of recession
  - the global economy is being squeezed between the financial crisis and higher commodity prices
  
  
•  Inflation has peaked and inflation fears are waning
  - ECB now expected to start cutting rates in H1 09
  
  
•  Weak and fragile recovery expected in 2009
  - Fed on hold for a prolonged period

Contents

• Introduction: At brink of global recession
• USA: A final leg down
• Euroland: Not much to be optimistic about
• Japan: Slipping into recession
• Emerging: Markets Everybody hurts
• Commodities: Fundamentals under pressure

Introduction: Stagflation light

The global economy continues to languish following the two major shocks to growth that have hit in the past year - the financial crisis and the run-up in commodity prices. The financial crisis was a substantial blow to housing markets globally, while the rise in commodity prices squeezed private consumption.

In the coming quarters the developed economies will totter on the brink of recession, with very weak growth in the US, Euroland, the UK and Japan. We expect a gradual - but fragile - recovery to kick off in the US in H1 09, and this will spread to the rest of the developed economies later in the year.

Our US growth forecast is broadly unchanged. We expect to see another leg down in growth in H2 08 as the boost from the Q2 tax package reverses and housing continues to be a drag. Exports will provide less support as global growth falters. However, we expect a gradual recovery in H1 09 as lower inflation underpins consumption growth and the drag from housing gradually fades. Lean inventories will provide a good base for improving production once demand growth recovers.

We have revised down our Euro area growth forecast and expect further weakness in activity for the rest of the year and into H1 09. Sluggish consumption growth, rapidly slowing exports and depressed housing markets will be the focal point of the slowdown. We expect a slow recovery to materialise in H2 09 on the back of higher US growth and a rise in real income growth as inflation comes down.

The slowdown has spread to most emerging markets, with GDP growth and industrial activity weakening in Asia, Central & Eastern Europe and Latin America. The Middle East is now the only major pocket of strength. The spike in inflation on the back of higher crude oil and commodity prices has hit EM Asia especially hard and forced reluctant Asian central banks to tighten monetary policy.

Central banks: The US central bank is expected to stay on hold for a long time. Falling inflation and inflation expectations should buy the Fed time. We do not foresee any rate hikes until H2 09. In Euroland, the ECB is now expected to deliver two rate cuts of 25bp in H1 09, taking the refi rate to 3.75%.

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Published on  Wed, Sep 24 2008, 07:57 GMT