Transcript Top-10 Predictions for 2009 Nariman Behravesh, Chief Economist January 21, 2009 1.

Top-10 Predictions for 2009
Nariman Behravesh, Chief Economist
January 21, 2009
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
2
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U.S. Real GDP Growth and Unemployment Rates
(Annual percent change, 2000 dollars)
(Percent)
8
10
6
9
4
8
2
7
0
6
-2
5
-4
4
-6
3
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Real GDP Growth
Unemployment Rate
3
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A Comparison of Peak-to-Trough Declines in
Real GDP in U.S. Recessions
(Percent change)
0
-1
-2
-3
Baseline
-4
Pessimistic
-5
1957- 1960- 1969- 1973- 1980 1981- 1990- 2001 2008- 20081958 1961 1970 1975
1982 1991
2009 2009
4
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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
5
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The Eurozone’s Economic Growth
(Percent change)
6
4
2
0
-2
-4
-6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Real GDP
Industrial Production
6
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Real GDP Growth in Western Europe
(Percent change)
4
3
2
1
0
-1
-2
-3
Germany
U.K.
2007
France
2008
2009
Italy
Spain
2010
7
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Japanese Economic Growth
(Percent change, real GDP)
8
6
4
2
0
-2
-4
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
8
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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
9
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It Is Still a Two-Speed World Economy
(Real GDP, percent change)
8
6
4
2
0
-2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Advanced Countries
Emerging Markets
Developing Countries
10
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Current Account Balances of Emerging Markets
(Percent of GDP, 2008)
Russia
Czech Republic
Hungary
Poland
Turkey
Venezuela
Argentina
Mexico
Brazil
China
Taiwan
South Korea
India
South Africa
-10
-5
0
5
10
15
20
11
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Real GDP Growth in Emerging Europe
(Percent change)
10
8
6
4
2
0
-2
Russia
Turkey
Poland
2007
2008
Czech
Republic
2009
Hungary
Romania
2010
12
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Real GDP Growth in South America
(Percent change)
10
8
6
4
2
0
-2
Brazil
Mexico
Argentina
2007
Venezuela
2008
Colombia
2009
Chile
Peru
2010
13
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Real GDP Growth in the Middle East and Africa
(Percent change)
8
6
4
2
0
-2
Saudi
Arabia
Iran
South
Africa
2007
UAE
2008
Israel
2009
Nigeria
Kuwait
2010
14
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Real GDP Growth in Asia-Pacific Economies
(Percent change)
14
12
10
8
6
4
2
0
-2
China
India
2007
South Korea
2008
2009
Australia
Taiwan
2010
15
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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
16
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Policy Interest Rates Have Plunged
(Percent)
6
5
4
3
2
1
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
United States
Eurozone
Japan
U.K.
17
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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
18
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A Record U.S. Federal Budget Deficit in Fiscal 2009
(Billions of dollars, fiscal years)
(Percent of GDP)
500
4
250
2
0
0
-250
-2
-500
-4
-750
-6
-1,000
-8
-1,250
-10
-1,500
-12
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Unified Budget Deficit
Deficit as % of GDP
19
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Fiscal Balances Will Deteriorate Across Regions
(Federal budget balance, % of GDP)
9
6
3
0
-3
-6
-9
NAFTA
Western
Europe
Japan
Other Emerging MideastAmericas Europe N. Africa
2007
2008
2009
SubSaharan
Africa
Other
AsiaPacific
2010
20
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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
21
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Industrial Materials Prices Plunge from Peaks
(IHS Global Insight Indexes, 2002:1=1.0)
6
5
4
3
2
1
0
2000
2001
2002
2003
All Materials
2004
2005
Chemicals
2006
2007
2008
Nonferrous Metals
22
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A Sharp Retreat in Crude Oil Prices
(West Texas Intermediate price, dollars per barrel)
140
120
100
80
60
40
20
0
1998
2000
2002
2004
2006
2008
2010
2012
23
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Real Crude Oil Prices Will Recover
(U.S. refiners’ acquisition price of imports, $/barrel)
120
100
80
60
40
20
0
1970
1975
1980
1985
1990
Nominal
1995
2000
2005
2010
2015
Real (2007 dollars)
24
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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
25
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Food and Energy Prices Cause a Swing in
U.S. Consumer Price Inflation
(Year-over-year percent change)
6
4
2
0
-2
-4
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
All-Urban CPI
Core CPI
Employment Cost Index
26
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U.S. Core Consumer Inflation Has Risen; Will Fall
(Excluding food and energy, percent change from a year earlier)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2001
2002
2003
2004
Core CPI
2005
2006
2007
2008
2009
2010
Core Consumption (PCE) Price Index
27
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Consumer Price Inflation Will Subside
(Percent change)
15
12
9
6
3
0
-3
NAFTA
Western
Europe
Japan
Other Emerging MideastSubAmericas Europe N. Africa Saharan
Africa*
2007
* Excluding Zimbabwe
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2008
2009
Other
AsiaPacific
2010
28
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
29
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The U.S. Current Account Deficit
(Billions of dollars)
(Percent of GDP)
250
2
0
0
-250
-2
-500
-4
-750
-6
-1,000
-8
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Current Account Deficit
Deficit as % of GDP
30
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Global Current Account Imbalances Remain Large
(Billions of dollars)
500
250
0
-250
-500
-750
-1,000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
United States
Asia exc. Japan
Western Europe
Middle East
Japan
31
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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
32
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U.S. Dollar Recovers Briefly
(Real Trade-Weighted Dollar Index, 2000=1.0)
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
1976
1980
1984
1988
1992
Major Trading Partners
1996
2000
2004
2008
2012
Other Important Trading Partners
33
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U.S. Dollar Exchange Rates
Near Parity with the Canadian Dollar
1.8
Limited Recovery Against the Euro
(Canadian dollars per U.S. dollar, quarterly averages)
(Euro per U.S. dollar, quarterly averages)
1.2
1.6
1.1
1.4
1.0
0.9
1.2
0.8
1.0
0.7
0.8
0.6
0.6
1996
1998
2000
2002
2004
2006
2008
2010
2012
0.5
1998
(Yen per U.S. dollar, quarterly averages)
9
130
8
110
7
90
6
70
5
2000
2002
2004
2006
2004
2006
2008
2010
2012
(Yuan per U.S. dollar, quarterly averages)
150
1998
2002
Falling Against China’s Renminbi
Depreciation Against Japanese Yen
50
1996
2000
2008
2010
2012
4
1996
1998
2000
2002
2004
2006
2008
2010
2012
34
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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
35
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U.S. Real GDP Growth in Alternative Scenarios
(Percent change, annual rate)
8
6
4
2
0
-2
-4
-6
-8
2001
2002
2003
2004
Baseline (60%)
2005
2006
2007
Pessimistic (20%)
2008
2009
2010
Optimistic (20%)
36
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Risk Associated with a Timid Policy Response to
the Crisis
(World GDP Growth)
5
4
3
2
1
0
-1
-2
2008
2009
Preliminary January Baseline
2010
2011
Possible Downside Scenario
37
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Thank you!
Nariman Behravesh
[email protected]