In her July newsletter, Swonk focuses on the economic outlook by region, prospects for inflation (or lack thereof), the health of credit markets, and what it all suggests about the future of the global economy:
The Developed World:
- The U.S. is widely expected to lead the developed economies out of recession in 2010. Very few economists are optimistic about how fast the U.S. can grow in 2010 and 2011, given the hit to credit markets that we have endured.
- Canada. The outlook for Canada is (unfortunately for them) closely tied to that of the U.S., as it is our largest trading partner -and trade has virtually collapsed.
- Europe. On net, Europe is not expected to emerge from its recession until late 2010 or early 2011. France is likely to be out of recession sooner than Germany. Ireland, Italy, Spain and the UK are expected to emerge last.
- Japan ranks last among the G7, with real GDP expected to decline more than 6% in 2009, but should rebound modestly in 2010. A collapse in exports - down at a 60% annual rate between the first and fourth quarters - and the collateral damage those losses caused for production and business investment were the primary culprits.
The Developing World:
- Latin America has survived the crisis better, and is expected to emerge sooner and stronger, than much of the developed world. One reason is that its banks were more capitalized and less exposed to the credit losses experienced in the U.S. and Europe. Both core and overall inflation are expected to remain relatively well-behaved.
- Both Central and Eastern Europe have been hit hard by the spillover effects of the recession in the European Union and the collapse in Russia. Investment in the industrial sector, in particular, has collapsed. Tourism is also down, from both the East and the West.
- Asia ex-Japan was hit fairly hard by the financial crisis, with most economies collapsing with the implosion of global trade. The exceptions were China, India, and Indonesia. India and Indonesia were largely insulated from the crisis because of a lack of credit exposure. The story on China, however, is more interesting because of its size.
- Africa is yet another region hard hit by the collapse in global trade. The exposure to the financial crisis, however, was fairly limited, which means that credit markets (wherever they exist) remain functional. There is also some offset to the collapse in commodity prices for the more commodity-based economies via increased investments by China.
- The Middle East. Plummeting oil revenues coupled with a fairly severe credit crunch have hurt countries in the Gulf region fairly hard. Saudi Arabia is in better shape to weather the storm than the United Arab Emirates - tourism in Dubai has held up, but real estate is imploding with the collapse in energy prices. Iraq is stabilizing, and despite reports of purchases of Iraq oil by China, the U.S. is still the major investor in Iraq, particularly in the North.
"The global economy will emerge badly battered but not beaten by the financial crisis. The worst-case scenarios - a resurgence in protectionism, widespread social unrest and political instability (except in places where we appreciate it, such as Iran) in particular - appear to have been averted. Even economists in hard-hit economies like those in Central Europe and Mexico are confident of this. The other side of the crisis, however, will look very different from anything we have known in the post-World War II period. The developed economies will have to be more focused on paying back than accumulating their debts, which will be painful, especially for economies such as our own, as we have become accustomed to living well beyond our means. Tighten your purse strings and boost your saving. We are in for a long haul," concludes Swonk.
