MODEST RECOVERY IN THE U.S. REMAINS LIKELY
Real GDP in the United States is forecasted to fall by -5.9% on an annual rate during the first quarter of 2009, signaling a deep point in the recession. Some better numbers are beginning to emerge. The Conference Board Leading Economic Index and Consumer Confidence Index suggest that the recession will not intensify further. The decline in real consumer spending has leveled off a little. Retail sales, excluding cars and car parts, rose by .7% in February, and some turns in the measures of home sales and prices were also recorded. The Conference Board projects that growth in the second quarter will stay negative and will be very slow in the third quarter, as capital spending will remain low and inventories will not be depleted until year's end. Overall industrial production is also unlikely to move up before the fall. Even the recovery in the fourth quarter will be held back by these negative trends and increased unemployment, which is typically a lagging indicator.
The U.S. may see a contraction in real GDP of -2.6% in 2009 - the largest annual decline since 1946. Nominal output (the value of output that also reflects price change) may actually fall at more than 4%, as disinflation is much more likely in the short run than inflation.
RISK OF A "DOUBLE-DIP" RECESSION
Back-to-back recessions, as occurred between 1980 and 1982 when the economy endured a systemic crisis rather than a regular recessionary period, are a potential risk at this time. Recent increases in commodity prices, on the back of monetary easing and decline in the dollar, are leading to an increase in inflation expectations.
"If the United States experiences a too rapid recovery, there may be a risk of another recession in 2010," cautions Van Ark. "It may fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery."
The likelihood of this happening is small as there are three substantial differences between the current crisis and that of the early 1980s: 1) Inflation was the concern then; now the possibility of deflation for the short and medium term is a greater threat. 2) The 1980s crisis was related to a structural transformation of the model of production in the U.S., moving from a manufacturing to a services economy; the current crisis was largely sparked by overleveraged balance sheets and global imbalances in consumption and savings. 3) This time we have massive governmental intervention intended to prevent economic activity from declining even further and stem the rise in unemployment.
LARGE DISCREPANCIES BETWEEN ADVANCED AND EMERGING ECONOMIES
The Conference Board argues that the divergence in growth performance between advanced and emerging economies will create a major challenge to rebalancing the world economy toward a more manageable global distribution of production, consumption and trade in goods and services.
The economies of commodity-producing countries - such as Russia and Brazil - have been producing bad results due to falling energy and commodity prices. China and India are the best bets to limit the global output collapse in 2009. China's export growth engine is under serious stress and the consumer sector will surely be affected by the decline in employment opportunities.
But the internal dynamics of growth created by the millions of consumers who still have a job or are able to find one in a slowing economy will continue to generate positive growth in China. Even though much of the U.S. $586 billion stimulus is likely to have already been baked into the government's investment plans, it may help keep China's growth rate at about 7.5% for 2009, says van Ark.
In India, as well as in several other large economies in the developing world that are somewhat less exposed to the global storm, the impact of the collapse in financial markets on fourth quarter GDP may have done a less lasting damage to the potential for growth this year.
