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Monthly Economic Outlook

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October 2008

Thu, Oct 9 2008, 09:12 GMT
by Wachovia Research Team

Wachovia

U.S. Overview

The Only Certainty Today Is Uncertainty

The incredible volatility in the financial markets is not only dominating the headlines but also dramatically reshaping the economic outlook. Capital is much harder to come by today for even the strongest of credits and this is already having a debilitating impact on consumer spending, business fixed investment and employment. Our near-term forecast has been slashed and a recession is now underway. We expect three consecutive quarters of declines in real GDP beginning with the third quarter of this year, which is expected to decline at a 0.7 percent annual rate.

We expect the peak-to-trough decline in real GDP to total 1.5 percent, in line with the contraction registered during the 1990-91 recession. However, we expect that final sales to consumers and businesses will drop about 3 percent, which would be the largest decline since the 1981-82 recession.

We believe consumer spending fell more than 3 percent (annualized rate) during the third quarter and expect another negative quarter in the current quarter. Most of the weakness in consumer outlays has been in big tickets items, such as cars and household durable goods. Consumers are also scaling back purchases of smaller items and services.

Given the changes to our outlook we now expect the Federal Reserve to cut interest rates further. We look for another 50 basis point rate cut at the October 29 FOMC meeting, with a final 25 basis point cut, which would take the fed funds rate to 0.75 percent, in December or January.

International Overview

Global Recession Looks Likely

Prospects for global growth have dimmed considerably over the past month as dislocations in credit markets have intensified. Indeed, most major foreign economies, including Canada, the Euro-zone, Japan and the United Kingdom each appear destined for a few quarters of negative growth as credit dislocations weigh on investment spending and as shell-shocked consumers rein in spending. Our revised forecast calls for global GDP to grow only two percent in 2009, the slowest year of growth since 1993.

Strains in credit markets, which are posing major downside risks to growth, induced major central banks (including the Fed, the ECB, the Bank of England, and the Bank of Canada) to cut rates by 50 basis points in a coordinated fashion on October 8. We look for further easing by foreign central banks. The Bank of England likely will cut rates another 150 basis points by early next year, and the ECB probably has another 75 basis points or so up its sleeve.

The greenback has strengthened recently as foreign borrowers have scrambled for dollar liquidity. Looking forward, the dollar could give up some of its recent gains when (if?) panic subsides. That said, we project that the dollar will trend higher throughout 2009 as foreign central banks continue to cut rates and as the U.S. current account deficit gets smaller. However, the situation in financial markets remains very volatile, which makes accurate forecasting nearly impossible.

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Published on  Thu, Oct 9 2008, 09:18 GMT