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Global Scenarios: Trends and risks

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Moving away from the abyss

Wed, Mar 11 2009, 14:06 GMT
by Danske Research Team

Danske Bank A/S

Contents

Introduction: Moving away from the abyss

Alternative 1: New fuel to the financial crisis

Alternative 2: Strong rebound in demand

USA: Darkest before dawn

Euroland:  Facing its first stress-test

Japan: Hitting the bottom will hurt

Emerging Markets: The crisis intensifies

Introduction: Moving away from the abyss

• Global GDP has collapsed over the past quarter with no regions escaping the downturn. Most recently, the crisis has increasingly moved to Europe and Central and Eastern Europe (CEE) where substantial financial and political tensions are visible. Not everything is doom and gloom, though. Emerging signs of an earlierthan- expected recovery in Asia has been a positive surprise, and leading indicators of global manufacturing production are also bottoming.

• The global economy and financial markets will take a long time to heal, and the sense of crisis should persist in the coming quarters. However, within this environment the massive stimulus from economic policy and lower commodity prices should succeed in stabilising global demand from Q2 2009 and onwards in our view. With the global business destocking process completing in the next few months, global manufacturing surveys should recover over the spring and summer quarters. We expect the contours of a global recovery to be in place entering H2 2009.

• The main risk to our global forecast is an even bigger negative impact from the financial crisis. Event risk remains high and renewed turmoil - not least in CEE - could postpone the recovery. Compared to market consensus we are slightly optimistic on the US and Asia, while we are pessimistic on Euroland and CEE. Consensus is rapidly moving down in the latter regions, though.

• We expect the US to move out of recession by mid-year 2009. Even though the recession dynamics are strong at the moment, the stimulus kicking in from Q2 is massive. We expect this to provide a sufficient boost for a moderate economic recovery in H2 2009. Deleveraging will continue to be a strong headwind, though.

• China has the deepest pockets in the world economy and is one of the few regions where lending standards are actually being eased rather than tightened. China looks to be "last in - first out" of the crisis and is expected to become a stabilising force in the global economy in 2009.

• In Europe the crisis is likely to draw out for a long time. Trend growth will not return until the end of 2010 on our estimates. CEE is in a very severe downturn, and with little ammunition to battle the crisis, the downturn should be long and deep. Substantial event risk for financial markets persists in this region.

• While headline inflation in most countries is expected to fall below zero during spring, this is mainly due to the decline in commodity prices. A huge output gap will put downward pressure on core inflation worldwide, but we believe the risk of deflation in core prices is limited.

• With most central banks at or approaching the zero interest rate boundary, the focus is turning to more non-standard measures such as quantitative easing. The Fed will continue - and possibly expand - its quantitative easing programme and the ECB could start an asset purchase programme during summer. In Emerging Markets we expect further policy easing where possible, but some countries will be forced to tighten fiscal policy in order to receive help from the IMF - especially in CEE.

• Download full Global Scenarios with charts - Part I
• Download full Global Scenarios with charts - Part II
• Download full Global Scenarios with charts - Part III
• Download full Global Scenarios with charts - Part IV
• Download full Global Scenarios with charts - Part V
• Download full Global Scenarios with charts - Part VI

Published on  Wed, Mar 11 2009, 18:14 GMT