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December 2009

Economic update

Evidence continues to accumulate supporting our thesis that the U.S. and global recessions are over and that sustained economic recoveries have begun, both in the U.S. and worldwide. The "global emergency rescue" of the financial system and the economy was a major success, at least from a short-term cyclical perspective and probably from a long-term perspective as well. Aggressive global policy stimulus in the form of central bank liquidity actions, monetary stimulus and government fiscal stimulus occurred in many different countries and succeeded in calming the financial crisis, ending the recession and starting a global expansion. Macroeconomic policy is stimulative in nearly every country in the world and we expect this harmonic of simultaneous macroeconomic stimulus to generate sustained expansion in nearly every country in the world in 2010.

 

There are a number of key issues. A summary of our views on these key issues follows. We expect a sustained global expansion at about a 4 per cent real GDP growth rate in the last half of 2009 and the four quarters of 2010, with financially strong countries leading and "debt hangover" countries growing more tentatively. We expect a sustained U.S. economic expansion at a real GDP growth rate of 3 per cent to 3.5 per cent in the last half of 2009 and the four quarters of 2010. The sustained U.S. expansion should be at a pace somewhat above the long-term trend growth rate near 2.5 per cent, but well below a normal rebound after such a severe recession. The economic recovery should be "above-trend but below-normal." We believe that a double dip recession is quite unlikely. We disagree with forecasts of a major further rise in the personal savings rate in the U.S., as income growth may be too sluggish to support it. We believe that the developed economies face a "job-light recovery," with labor markets only slightly stronger than in a "jobless recovery." The official U.S. unemployment rate should peak in the spring of 2010 near 10.5 per cent, followed by only gradual improvement. The persistence of high unemployment in the developed economies should create recurring "trade skirmishes" and concerns about the risk of a "jobs trade war."

 

We believe that high current budget deficits are not a major problem, but that high long-term structural deficits are a very serious problem about which little serious policy reform is likely in the next few years. In our view, stimulative monetary and fiscal policies have largely worked to reflate real economic activity and securities prices.

 

By Richard B. Hoey, chief economist, BNY Mellon

November 3, 2009

 

 

This report represents the general economic overviews of Mr. Richard Hoey, chief economist, BNY Mellon, and does not constitute investment advice, nor should it be considered predictive of any future market performance.

 

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