U.S. Overview
“The Recovery Will Be Agonizingly Slow”
So it indeed has been. As this short quote from the Executive Summary of our 2009 Annual Outlook (published in December 2008) neatly summarized, the economic recovery faces a number of secular challenges that will alter the pace and composition of growth. For many decision-makers, the outlook for 2010 suggests continued change and adjustment to an altered reality of more government/less private sector contributions to growth, greater caution/less leverage for consumer spending, greater prudence/less speculation in lending and the importance of exports in moving the U.S. economy.
Even though our outlook for continued growth in the overall economy would suggest a normal cycle, the underlying forces in this economy are anything but normal. Much of the near-term gain in growth reflects federal, not private spending; foreign buying via exports, not domestic spending and production to rebuild inventories, not for new final sales. These odd characteristics of our growth in the short term give rise to questions about the sustainability of the recovery over time.
Finally, our outlook is framed, as it has been for two years, by the character of America’s evolving credit cycle. This credit cycle will not be a repeat of the past. We are still searching for that new balance in private and public leverage. We have not yet defined the limits of federal fiscal and monetary support. We are unsure of continued foreign purchases of U.S. securities and what price foreign investors might be willing to pay.
International Overview
Is Coordinated Policy Easing Still Appropriate?
Leaders of the G-20 countries recently agreed to “avoid any premature withdrawal of stimulus” in order to secure a “durable recovery.” Policy stimulus may be appropriate for many advanced economies, which probably will experience sluggish upturns due to further deleveraging, and we expect that most major central banks will maintain their respective policy rates at extremely low levels through much of next year. However, bona fide recoveries appear to be taking hold in many parts of the developing world, and it is no longer apparent that continued policy accommodation remains in the best long-run economic interests of many of these countries.
Consider Brazil, for example. Although the Brazilian inflation rate has trended lower since the end of last year, we project that it will begin to rise again in mid-2010 as growth strengthens and commodity prices trend higher. With budding inflationary pressures, continued policy accommodation would not be appropriate. The Reserve Bank of Australia recently surprised most investors by hiking its main policy rate by 25 bps, and central banks in many developing countries will likely begin their own tightening cycles early next year as well. We do not mean to imply that developing countries will slam on the brakes, thereby threatening to derail the incipient global recovery. Inflation is generally benign at present, and there is no need for excessive tightening. However, policy will need to become less accommodative in many developing countries or inflation could become a major problem again.
