- • The deterioration in financial conditions in recent weeks has been faster and more severe than we had envisioned. Our downside risk scenario for the US economy is now materialising and we have revised our macroeconomic and monetary policy outlook as a result. We now expect the US economy to enter into recession in the coming quarters and do not expect growth to reach trend before 2010.
- • With both consumer and business credit drying up, domestic demand will face serious headwinds in the coming quarters. We expect a significant contraction in both private consumption and business investment. While the drop in commodity prices will cushion the blow to households it is not enough to offset a recession as falling equity prices put further downward pressure on consumption growth.
- • The Federal Reserve has restarted its easing cycle, and we expect a further 25bp cut at the meetings in October and December, taking the fed funds rate to 1% by year-end. Further policy measures aimed at unfreezing the money and credit markets are also in the pipeline.
