It seems a Q3 recovery is the new consensus of professional economists. First, we hear Paul Krugman saying this, now Richard Berner and David Greenlaw are singing the same tune.
The deepest post-war recession likely will end by mid-to-late summer, a bit sooner than we’ve been expecting. The improvement in financial conditions and incoming data has outpaced expectations, and the backdrop for global growth is less daunting. Recessions are protracted declines in output, employment, incomes and sales, and all seem likely to stop declining within the next several months. Thus, for the second month in a row, we’re slightly boosting our near-term economic outlook: We are raising 2Q-4Q09 estimates for the change in GDP by half a point, netting to a decline of 1.5% over the four quarters of 2009, compared with an expected 1.9% contraction a month ago. However, we strongly believe that the recovery will be gradual. Despite the ongoing benefits of monetary and fiscal stimulus, the economy faces several headwinds that seem likely to limit the growth pace through the end of 2010.
I have been conservative and talking Q4 or Q1 here (and have been criticized as too optimistic), even though the data has been suggesting Q3 since at least April (see my posts “The Fake Recovery” and “Are jobless claims peaking?”). So Morgan Stanley now has a very bullish view which more or less makes Robert Gordon look on the money. Have a look at the rest of the Morgan Stanley research piece, it makes for interesting reading. Here are the key section headers
- There’s no mistaking the rapid improvement in financial conditions.
- Incoming economic data have also improved faster, if only slightly beyond expectations.
- More important, however, we think that both the logic and evidence for a gradual recovery remain intact.
- Sharply rising energy prices are fueling a pick-up in headline inflation, but slack in the US and global economy is exerting downward pressure on ‘core’ inflation.
- In this environment, the Fed faces a number of important challenges.
- Against this backdrop, financial markets have priced out the adverse tail risk of prolonged recession and deflation.