Three views of the global economy

Today’s Globe & Mail does an excellent job of presenting the three different potential outcomes for the global economy, one optimistic, one pessimistic and a third somewhere in between. Below are the key snippets of their article reflecting each of the three outcomes. However, I highly recommend reading the full article which is linked below.

The optimistic forecast – Mark Carney, Bank of Canada
Sure, 2009 will be a year of misery – for Canada, the U.S. and most of the world. But once we’re through the next few months, all the economies that plunged into a synchronized global recession rise again in unison like a flock of Canada geese.

The recovery starts where it all began – in the U.S. Mr. Carney expects the U.S. economy to shrink 1.7 per cent this year, rebounding nicely in 2010, growing 2.6 per cent.

And yet Mr. Carney’s GDP forecasts are a full percentage point more optimistic than most private sector forecasts. Morgan Stanley, for example, is calling for gross domestic product to shrink 2.7 per cent this year, and grow a modest 1.8 per cent in 2010.

All things considered, Canada gets off pretty lightly, the way Mr. Carney sees it. The economy shrinks 1.2 per cent in 2009, before roaring back to life in 2010.

Far from being the worst crisis since the Great Depression, Mr. Carney sees Canada bouncing back much faster than it did from previous recessions – in 1981-82 and 1990-92.

The middle of the road forecast – Mark Zandi,
“The economy is expected to stabilize by year’s end,” Mr. Zandi says. “But this depends on a multitude of things going reasonably right, and on policy makers’ ability to implement their plans quickly.”

Fiscal stimulus will create or save as many as three million U.S. jobs and keep unemployment 1.5 percentage points lower than it otherwise would be.

“The plan is reasonably well structured,” Mr. Zandi says of the Obama administration’s stimulus plan.

The Treasury Department’s public-private scheme to purchase bad assets from financial institutions and “stress test” troubled institutions should help stabilize the financial system, Mr. Zandi adds.

Even then, the recovery will be long, hard and a lot more costly. There will be more job losses, further depressing consumer spending.

The banks will need a lot more capital to weather the recession. Millions more Americans will lose their homes to foreclosure…

“If we do get the stimulus, if we do get financial stability, I’m hopeful that by this time next year we’ll have a more stable economy and a more stable jobs market,” Mr. Zandi predicts.

The pessimistic forecast – Nouriel Roubini
“Even if the U.S. were to do everything right and fast enough, we would still have a severe … recession until early 2010, with a weak recovery of growth,” Prof. Roubini argues. “But if the U.S. does not do it right, this U.S. and global recession may turn into a nasty multiyear L-shaped, near-Depression like the one experienced by Japan.”

The way Prof. Roubini figures it, the recession is only half over. Unemployment will soar toward 10 per cent by mid-2010 from 7.6 per cent now, and stay punishingly high for some time. And for the next several months, expect 400,000 to 600,000 U.S. jobs to vanish every month.

U.S. real estate prices will fall another 20 per cent, on top of the 25 per cent decline we’ve already seen. Housing starts, after tumbling 75 per cent, will decline another 20 per cent. His reasoning is simple: All those layoffs, tighter credit conditions and lost stock market wealth have created a vicious cycle that puts more homeowners upside-down on their mortgages.

As a result, he argues, the number of U.S. underwater mortgages – households who owe more on their mortgages than their homes are worth – could more than double to 25 million from 12 million now. That would wipe out as much as $4-trillion worth of wealth, or roughly equal to what’s already been lost.

Following the money chain, bank losses will peak at $3.6-trillion, and we’re not even half-way there. U.S. stocks, already down nearly 50 per cent, could fall another 20 per cent. That virtually guarantees that one or more of the surviving big U.S. banks will fail, or be swallowed by a rival.

Prof. Roubini says the U.S. is headed for a 3.4 per cent drop in GDP this year, followed by just 1 per cent growth in 2010.

Three Roads for the Global Economy – Globe & Mail

  1. rawdawgbuffalo says

    between Biden and Tim Geithner, seems like Obama has built an administration of cards

  2. Econophile says

    Where do you stand, Ed?

  3. Edward Harrison says


    I generally take a view somewhere between Zandi and Roubini. However, it is very much dependent on reflexivity (see my post: “Too big to rescue“). I would not dismiss the Bank of Canada guy out of hand. Psychology is such an important element to the credit unwind process, that it makes it VERY difficult to analyze anything more than 3-6 months out.

    For example, was the present situation unmistakable 12 months ago or did the Lehman crisis change the calculus measurably? I would say that Lehman changed things. So, going forward, the same is also true — the psychology of deflation and reflexivity will have an immeasurable impact on the course of events. And remember, Japan rebounded multiple times during its down cycle. So, just because there are chronic problems, doesn’t mean we won’t rebound due to stimulus.

    I plan to write a post on the psychology of deflation soon, so when I do, feel free to chime in.


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