Top-10 Predictions for 2009

Top-10 Predictions for 2009Top-10 Predictions for 2009

Nariman Behravesh, Chief EconomistJanuary 21, 2009

Copyright © 2009 IHS Global Insight. All Rights Reserved.

2

1. The U.S. Recession Will Be One of the Deepest — if Not the Deepest — in the Postwar Period

• The current downturn is well on its way to becoming the longest in the past six decades

• It is also in the running to have the largest peak-to-trough drop in real GDP

• The steep back-to-back declines in Q4 and Q1 growth are likely to be near-records as well

• The huge November and December payroll losses portray an economy in freefall

• Hopes of a mid-2009 turnaround rest on massive fiscal stimulus being put in place quickly


3

(Annual percent change, 2000 dollars) (Percent)

U.S. Real GDP Growth and Unemployment Rates

-6

-4

-2

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20113

4

5

6

7

8

9

10

Real GDP Growth Unemployment Rate


4

-5

-4

-3

-2

-1

0

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2008-2009

2008-2009

(Percent change)

A Comparison of Peak-to-Trough Declines in Real GDP in U.S. Recessions

Baseline

Pessimistic


5

2. Also One of Worst Downturns for Europe and Japan in Many Decades

• Japan, Germany, Ireland, and Italy are already in recession — others will follow them down

• The first Eurozone recession will also be one of the worst for most European countries since the end of World War II

• For Japan, the downturn will be worse than during the Asia Crisis

• Large current account surpluses and relatively high saving rates have not spared Germany and Japan — in fact, reliance on export-led growth is a serious vulnerability

• Timid policy responses in the Eurozone and Japan could mean a prolonged slump


6

-6

-4

-2

0

2

4

6

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Real GDP Industrial Production

(Percent change)

The Eurozone’s Economic Growth


7

-3

-2

-1

0

1

2

3

4

Germany U.K. France Italy Spain

2007 2008 2009 2010

(Percent change)

Real GDP Growth in Western Europe


8

-4

-2

0

2

4

6

8

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

(Percent change, real GDP)

Japanese Economic Growth


9

3. Growth in Emerging Markets Will Decelerate Dramatically

• Forget “de-coupling”

• Collapsing commodity prices are hurting many emerging economies including Russia, Venezuela, Iran, and South Africa — will the Gulf states be next?

• The drying up of global capital flows is also doing a lot of damage, especially to countries with large current account deficits — many of these are in Emerging Europe and some have sought help from the IMF

• Contracting world trade will hurt the export powerhouses of Asia

• For many emerging markets, 2009 growth will be less than half the rate in 2007


10

-2

0

2

4

6

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Advanced Countries Emerging Markets Developing Countries

(Real GDP, percent change)

It Is Still a Two-Speed World Economy


11

-10 -5 0 5 10 15 20

RussiaCzech Republic

HungaryPolandTurkey

VenezuelaArgentina

MexicoBrazilChina

TaiwanSouth Korea

IndiaSouth Africa

(Percent of GDP, 2008)

Current Account Balances of Emerging Markets


12

-2

0

2

4

6

8

10

Russia Turkey Poland CzechRepublic

Hungary Romania

2007 2008 2009 2010

(Percent change)

Real GDP Growth in Emerging Europe


13

-2

0

2

4

6

8

10

Brazil Mexico Argentina Venezuela Colombia Chile Peru

2007 2008 2009 2010

(Percent change)

Real GDP Growth in South America


14

-2

0

2

4

6

8

SaudiArabia

Iran SouthAfrica

UAE Israel Nigeria Kuwait

2007 2008 2009 2010

(Percent change)

Real GDP Growth in the Middle East and Africa


15

-2

0

2

4

6

8

10

12

14

China India South Korea Australia Taiwan

2007 2008 2009 2010

(Percent change)

Real GDP Growth in Asia-Pacific Economies


16

4. Central Banks Will Keep Cutting Rates

• The race to zero is on!

• The Fed and the BoJ have pushed rates effectively all the way to zero

• Many European central banks have become more aggressive recently, especially the Bank of England and the Bank of Sweden

• The European Central Bank has been the most cautious of the bunch, but it too will have to make more big cuts

• With few exceptions, almost all central banks are cutting

• So far, no other central banks have matched the big and unorthodox moves by the Fed


17

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

United States Eurozone Japan U.K.

(Percent)

Policy Interest Rates Have Plunged


18

5. More Fiscal Stimulus in the Pipeline — Some of It Massive

• The in-coming Obama administration is talking about large fiscal stimulus — estimates range from $775 billion to $1 trillion (5.5% to 7% of GDP) to be spread over two to three years

• “Permanent” tax cuts, infrastructure spending, extended unemployment benefits, help for state and local governments, and aid directed at housing and autos will likely all be part of the plan

• China has also announced a big stimulus package, worth about 14% of GDP over two years — even if only half is “real” is could add 2 percentage points to growth in 2009

• European stimulus proposals (1% to 1.5% of GDP) have been much more timid, so far


19

(Billions of dollars, fiscal years) (Percent of GDP)

A Record U.S. Federal Budget Deficit in Fiscal 2009

-1,500

-1,250-1,000

-750-500

-250

0250

500

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-12

-10-8

-6-4

-2

02

4

Unified Budget Deficit Deficit as % of GDP


20

-9

-6

-3

0

3

6

9

NAFTA WesternEurope

Japan OtherAmericas

EmergingEurope

Mideast-N. Africa

Sub-Saharan

Africa

OtherAsia-

Pacific

2007 2008 2009 2010

(Federal budget balance, % of GDP)

Fiscal Balances Will Deteriorate Across Regions


21

6. Commodity Prices Will Remain at Depressed Levels for Much of Next Year

• The collapse in commodity prices in a matter of a few months (60% to 80%) has been unprecedented

• Further drops are likely, as markets have not fully factored in the depth of the world recession and the very weak growth in emerging markets — demand is being “destroyed” on a very large scale

• Oil is headed for less than $40 per barrel and the chances of hitting $30 are rising

• Good news: The big drop in oil prices is like a tax cut for oil importing countries — more than $250 billion for U.S. consumers alone — from the decline in gasoline prices


22

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008

All Materials Chemicals Nonferrous Metals

(IHS Global Insight Indexes, 2002:1=1.0)

Industrial Materials Prices Plunge from Peaks


23

0

20

40

60

80

100

120

140

1998 2000 2002 2004 2006 2008 2010 2012

(West Texas Intermediate price, dollars per barrel)

A Sharp Retreat in Crude Oil Prices


24

0

20

40

60

80

100

120

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Nominal Real (2007 dollars)

(U.S. refiners’ acquisition price of imports, $/barrel)

Real Crude Oil Prices Will Recover


25

7. Inflationary Fears Will Be Replaced by Concerns About Deflation

• Anxiety about inflation in many parts of the world has evaporated…

• …To be replaced by growing fears that the United States and other parts of the world will be gripped by deflation

• Headline CPI and PPI inflation will be negative in the United States throughout much of 2009 and core measures of inflation will fall to around 0.5%

• Inflationary pressures are likely to be a little more persistent in Europe

• China and Japan will see a return of late-1990s-type deflation


26

(Year-over-year percent change)

-4

-2

0

2

4

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

All-Urban CPI Core CPI Employment Cost Index

Food and Energy Prices Cause a Swing in U.S. Consumer Price Inflation


27

(Excluding food and energy, percent change from a year earlier)

U.S. Core Consumer Inflation Has Risen; Will Fall

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Core CPI Core Consumption (PCE) Price Index


28

-3

0

3

6

9

12

15

NAFTA WesternEurope

Japan OtherAmericas

EmergingEurope

Mideast-N. Africa

Sub-SaharanAfrica*

OtherAsia-

Pacific

2007 2008 2009 2010

(Percent change)

* Excluding Zimbabwe

Consumer Price Inflation Will Subside


29

8. Global Imbalances Will Improve Markedly over the Next Couple of Years

• The long-awaited correction of the gaping global imbalances is happening — with a vengeance

• The U.S. current account deficit in 2009 will be about 40% of the level in 2007 — though some of the improvement will be temporary

• The large drop in commodity prices signals a dramatic reversal in the global terms-of-trade and a “re-balancing” of global growth, with commodity-importing countries being the major beneficiaries

• Without policies to boost domestic demand in the surplus countries, the improvement in global imbalances may be short lived


30

-1,000

-750

-500

-250

0

250

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016-8

-6

-4

-2

0

2

Current Account Deficit Deficit as % of GDP

(Billions of dollars) (Percent of GDP)

The U.S. Current Account Deficit


31

-1,000

-750

-500

-250

0

250

500

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

United States Western Europe JapanAsia exc. Japan Middle East

(Billions of dollars)

Global Current Account Imbalances Remain Large


32

9. The Dollar Will Remain Relatively Strong as Long as the Financial Crisis Continues

• “The best looking horse in the glue factory”

• The safe-haven/principal-reserve-currency status of the dollar has trumped all other fears

• Also, markets may be signaling greater confidence in the ability of U.S. policy makers to turn the economy around

• Nevertheless, once the crisis is over, fundamental forces (e.g., the U.S. current account deficit) are likely to push the dollar back down again

• However, a return to the very weak levels of the dollar against the euro and other floating currencies seems unlikely


33

(Real Trade-Weighted Dollar Index, 2000=1.0)

U.S. Dollar Recovers Briefly

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Major Trading Partners Other Important Trading Partners


34

U.S. Dollar Exchange Rates

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1996 1998 2000 2002 2004 2006 2008 2010 20120.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1998 2000 2002 2004 2006 2008 2010 2012

50

70

90

110

130

150

1996 1998 2000 2002 2004 2006 2008 2010 2012

Near Parity with the Canadian Dollar Limited Recovery Against the Euro

Depreciation Against Japanese Yen Falling Against China’s Renminbi

(Canadian dollars per U.S. dollar, quarterly averages) (Euro per U.S. dollar, quarterly averages)

(Yen per U.S. dollar, quarterly averages)

4

5

6

7

8

9

1996 1998 2000 2002 2004 2006 2008 2010 2012

(Yuan per U.S. dollar, quarterly averages)


35

10. The Single Biggest Risk Facing the U.S. and Global Economies Is a Timid Policy Response

• Given the expected depth of this recession, the policy response need to be big, bold, and swift

• The good news is that the United States and China understand this challenge

• The bad news is that Europe, Japan, and some countries in the emerging world are taking a more cautious approach

• Prolonged slumps in some of the world’s key economies could not only result in a much worse global recession, but the ensuing recovery could also be very weak


36

(Percent change, annual rate)

U.S. Real GDP Growth in Alternative Scenarios

-8

-6

-4

-2

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Baseline (60%) Pessimistic (20%) Optimistic (20%)


37

Risk Associated with a Timid Policy Response to the Crisis

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011

Preliminary January Baseline Possible Downside Scenario

(World GDP Growth)

Thank you!Thank you!

Nariman [email protected]

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Top-10 Predictions for 2009