ADVERTISEMENT

Major world economies still at risk of recession

Analysis

The world’s major industrialized economies are still at risk of falling into recession this year, and more so than just a month ago, even as elevated inflation leaves policymakers unable to slash interest rates.

Reuters polls of around 200 economists in the US, Europe, Japan and Britain published on Thursday show a still-floundering US economy grappling with the credit crunch and a deterioration in the outlook for Europe -- particularly Britain.

The survey was taken after news of a sudden leap in the US jobless rate to 6.1% and most responses came after the government seized at the weekend the giant, but ailing, mortgage lenders Fannie Mae and Freddie Mac. While the poll figures reveal a brightened outlook for the US this year after a much better than expected performance in the second quarter, the equally sharp downgrade to the full-year 2009 GDP forecast offsets that improvement. “A vicious circle is still unfolding of credit weakening the economy, and the economy weakening credit, typical of recessionary periods,” said Steven Wieting, economist at Citigroup in New York.

That comes despite a powerful rally in the dollar over the past month that now has a majority of top foreign exchange strategists convinced it has ended seven years of retreat and is now at the start of a multi-year upturn. “A slowdown in world economic growth and renewed strength in the US dollar has helped calm oil and other commodity prices, giving consumers and businesses alike a little more breathing room,” noted Ellen Beeson Zentner, economist at Bank of Tokyo/Mitsubishi UFJ in New York. But she added this rise in the currency will be hurtful to export growth, which has been one of the key supports to the US economy throughout this year. On the flipside, weakness in the euro could help springboard Europe’s eventual recovery.


INFLATION STICKING

One surprising conclusion from the Reuters polls is the near-$50 plunge in the oil price to around $100 a barrel has had little effect on the outlook for full-year 2009 inflation, even though it is seen gradually declining as the year progresses. There were no downgrades to the view for inflation save for a sliver off of the median for the euro zone this year to 3.5% and to core inflation in Japan next year to 1.0%.

Indeed, viewed over the last year since the credit crunch began, the inflation consensus in the Reuters poll makes for unsettling reading, particularly for the Bank of England. One year ago, the consensus for inflation in 2008 was to average 1.9%, just below the 2.0% target. Now it is 3.8%, nearly double the target, and up from the poll last month. In the meantime the pound has plunged on recession worries. “Sterling’s latest bout of weakness will reinforce upward inflation pressures,” said Stephen Lewis, chief economist at Monument Securities. That said, inflation is likely to fall sharply toward the end of next year from around 4.7% in the next three months to 1.8% in the Q4 of 2009.

Economists now see two quarter-point cuts in the Q1 of 2009 to 4.50% and a 55% chance of recession -- up from 45% last month and just 20% at the start of the year. For the euro area, the median expectation for 2009 inflation was 2.0% in the Reuters poll nearly one year ago. Now, it’s 2.4% -- versus European Central Bank staff forecasts for 2.6% and unchanged from the last poll.

That does a lot to explain why economists still don’t see ECB rates coming down until the second quarter of next year. The median euro zone GDP forecasts for this year was downgraded to 1.3% and to just 0.9% in 2009. And a Bank of Japan rate hike from the already meager 0.50% is not likely until the end of next year and is increasingly unlikely to happen at all given the gloomy outlook for the world’s second largest economy. (Reuters)

ADVERTISEMENT

2,361 new COVID cases registered in Hungary Figures

2,361 new COVID cases registered in Hungary

Parl't votes to phase out savings coops integration framewor... Parliament

Parl't votes to phase out savings coops integration framewor...

Roche Szolgáltató appoints P&C business partner lead Appointments

Roche Szolgáltató appoints P&C business partner lead

FAO–Food Bank convoy delivers food to those in need City

FAO–Food Bank convoy delivers food to those in need

SUPPORT THE BUDAPEST BUSINESS JOURNAL

Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.