Update global forecast: Prospects for 2010: From the exit to the exit
This year, spoke only on emerging from the great recession, and, as we expected earlier this year, it all became possible because of the massive global government incentives. The next year will only talk about withdrawal from the extra-expansionary monetary policy, and we expect this process will begin around mid-2010. Yes, probably, these actions will be cautious, gradual and transparent. Nevertheless, the prospects and process outputs can have unintended consequences: we think that the government bond market will be the first victim. Although we believe that the withdrawal will be the dominant theme in macroeconomics in the next year, we allocate 5 important economic themes in the context of global perspectives, which we believe will be very important for investors in 2010.
A tale of two worlds: We predict 4% of global GDP growth in 2010, which was only slightly expressed only about three months ago (see the previous global forecast: "Up without hesitation, 10 September 2009). Indeed, if these data are confirmed, it will be a worthy outcome, especially in comparison with the extensive pessimism during the year. However, this growth rate falls short of the 5% that was observed during the 5 years before the great recession that is the result of an unprecedented monetary and fiscal incentives that create significant long-term risks in different directions. In addition, our 4% of global GDP growth mask two very dissimilar stories. One of them - this is very cool recovery in developed economies - "BBB" restoration, which we discuss below. Another - this is a much more positive outlook for emerging markets, which we predict the growth of output by 6,5% in 2010 (China - 10%, India - 8%, Russia - 5.3% Brazil - 4.8%) with 1,6% this year. Restoring the balance in favor of domestic demand leads to growth in developing markets in the process of change. In addition, as noted by our Chinese economist, the official statistics are likely to greatly underestimate the level and rate of growth of consumer spending in China. In short, we believe that growth in emerging markets is clearly in advance of the dynamics of this situation and even strengthened during the crisis.
BBB-Rebuilding G10: in contrast to our optimistic stories about the emerging markets of the developed economies of the G10, we forecast GDP growth, which barely reaches 2%, and the restoration of BBB is nothing more than in - bumpy - bumpy, IN - below - par - below normal, and B - boring - boring. According to our estimates, GDP growth in more than a dozen countries on average 2% in the second half of this year and next year the rate is not greatly accelerated, and hence the conclusions in our article "up" without "hesitation", published three months ago, which remain relevant . There are two probable reasons, because we believe that the recovery in developed economies will be held on the principle of 'BBB': lack of credit and unemployment. Recovering in a lack of credit means a situation where banks are reluctant to lend, and non-bank private sector does not want to take, which is a standard situation after the credit boom in the last cycle, and the banking crisis, restoration of the shortage of credit reflects the economic growth below potential, as mobilization of capital through credit and financial system is difficult. In addition, we expect the resumption of growth of unemployment in the G10, with only slight reduction in the level of the U.S. next year, and continued growth in Japan and Europe. Unemployment in developed countries may be structurally higher in the next few years, as many unemployed people have the wrong skills or they are in the wrong environment, where there is a change of sectoral or regional growth.
More differences in growth in the countries of the Big Three: Beneath the surface of what we call a dull BDB recovery in developed economies is differentiated history for the three largest economies in the bloc: the U.S., Eurozone and Japan. We expect significant growth differences between them in 2010, which again may affect the currency, interest rates and stock markets. We see the U.S. as a leader among this group in the next year, with an average annual GDP growth of 2,8%. Euro area economy seems to show twice the smaller growth than the United States (1.2%), while Japan should grow by only 0.4% next year, and, thus, effectively re-enters the stage of technical recession in the first half of next year. One of the main reasons advanced dynamics of the U.S. lies in the fact that lack of credit affects less than the private sector, as banks (as opposed to capital markets) play a smaller role in financing the economy than in Europe or Japan. Another reason is that American companies were much more aggressive in the dismissal of workers this year than their European or Japanese counterparts, so the labor market in the United States will demonstrate the recovery (albeit slow) in the next year, while unemployment is expected to grow both in Europe and in Japan. In addition, European and Japanese exporters have to face difficulties because of currency effects, at the time, as U.S. exporters should benefit from the weakness of the dollar this year.
Moving toward the exit, the cycle of liquidity with the country rated AAA, remains unchanged: As mentioned above, we expect to start out of the super-expansionary monetary policy implications of the same will be the main theme of the macro economy in 2010. Next week we will discuss the details of the likely monetary exit strategy in different countries at the final annual meeting on global monetary policy. Suffice it to say that we expect from the Fed, the ECB, the People's Bank of China joint motion in the direction of higher interest rates in 3Q10, with the Bank of England, close to the 4Q. The central banks of countries such as India, Korea and Canada are likely to begin earlier, and such as Japan - will lag behind. Given the vulnerability of the financial sector, central banks would try to go gently, gradually and in a transparent manner, so that any body movements will be known in advance, partly developed by the relevant signals, and partly due to the partial use of bank reserves. It is important to note that, while weakening the end and beginning of release, will cause fluctuations in financial markets, and this is one reason why we see a sharp drop in bonds next year, it should be noted that official rates will probably stay below its neutral level (even domestic factoring, is likely to be lower than it was in the past) during 2010, and even in 2011. Thus, monetary policy will only go from "super-expansionary" to "remain quite expansionary." This can lead to what we call a cycle of liquidity AAA (ample - sufficient, abundant - plentiful, augmenting - multiplier), which we identified as the main driving forces in asset prices, economic recovery and good luck this year, ending in the next. Indicators, which we follow to confirm or refute this idea are our global measure for the measurement of excess liquidity, which is defined as operating money (cash and overnight deposits), held not by banks in calculating the nominal GDP. This figure exploded this year, and we expect further growth, albeit at a much lower rate during 2010.
Sovereign and inflation risks on the rise. The fifth and last main topic for discussion at the market in 2010 will be "sovereign risk and inflation risk." In our view, current issues related to the financial problems of Greece, still affect many developed (not developing) economies. We note that fiscal policy will remain expansionary in nature in all the major economies next year, and, as it should be, BBB-recovery will still need support. Nevertheless, markets are likely to worry about long-term financial sustainability, and rightly so. It is important to note that this is not about potential defaults of developed economies. It is extremely unlikely for one simple reason: most of the outstanding debts of governments with developed economies are in domestic currency. If (although unlikely), the Government will not be able to finance payments to repay the debt by issuing new debt through higher taxes or sales of assets, will be able to direct their Central Bank to print as much money as needed (you can call it quantitative easing). Thus, ultimately, the sovereign risk means the risk of inflation, rather than a direct risk of default. We expect that markets will increasingly pay attention to this next year, pushing inflation premiums and, consequently, bond yields are much higher. In other words, the next crisis is likely to be a crisis of confidence the government and the central bank's ability to take on increasing debt burden of the public sector, without creating inflation.
This year, spoke only on emerging from the great recession, and, as we expected earlier this year, it all became possible because of the massive global government incentives. The next year will only talk about withdrawal from the extra-expansionary monetary policy, and we expect this process will begin around mid-2010. Yes, probably, these actions will be cautious, gradual and transparent. Nevertheless, the prospects and process outputs can have unintended consequences: we think that the government bond market will be the first victim. Although we believe that the withdrawal will be the dominant theme in macroeconomics in the next year, we allocate 5 important economic themes in the context of global perspectives, which we believe will be very important for investors in 2010.
A tale of two worlds: We predict 4% of global GDP growth in 2010, which was only slightly expressed only about three months ago (see the previous global forecast: "Up without hesitation, 10 September 2009). Indeed, if these data are confirmed, it will be a worthy outcome, especially in comparison with the extensive pessimism during the year. However, this growth rate falls short of the 5% that was observed during the 5 years before the great recession that is the result of an unprecedented monetary and fiscal incentives that create significant long-term risks in different directions. In addition, our 4% of global GDP growth mask two very dissimilar stories. One of them - this is very cool recovery in developed economies - "BBB" restoration, which we discuss below. Another - this is a much more positive outlook for emerging markets, which we predict the growth of output by 6,5% in 2010 (China - 10%, India - 8%, Russia - 5.3% Brazil - 4.8%) with 1,6% this year. Restoring the balance in favor of domestic demand leads to growth in developing markets in the process of change. In addition, as noted by our Chinese economist, the official statistics are likely to greatly underestimate the level and rate of growth of consumer spending in China. In short, we believe that growth in emerging markets is clearly in advance of the dynamics of this situation and even strengthened during the crisis.
BBB-Rebuilding G10: in contrast to our optimistic stories about the emerging markets of the developed economies of the G10, we forecast GDP growth, which barely reaches 2%, and the restoration of BBB is nothing more than in - bumpy - bumpy, IN - below - par - below normal, and B - boring - boring. According to our estimates, GDP growth in more than a dozen countries on average 2% in the second half of this year and next year the rate is not greatly accelerated, and hence the conclusions in our article "up" without "hesitation", published three months ago, which remain relevant . There are two probable reasons, because we believe that the recovery in developed economies will be held on the principle of 'BBB': lack of credit and unemployment. Recovering in a lack of credit means a situation where banks are reluctant to lend, and non-bank private sector does not want to take, which is a standard situation after the credit boom in the last cycle, and the banking crisis, restoration of the shortage of credit reflects the economic growth below potential, as mobilization of capital through credit and financial system is difficult. In addition, we expect the resumption of growth of unemployment in the G10, with only slight reduction in the level of the U.S. next year, and continued growth in Japan and Europe. Unemployment in developed countries may be structurally higher in the next few years, as many unemployed people have the wrong skills or they are in the wrong environment, where there is a change of sectoral or regional growth.
More differences in growth in the countries of the Big Three: Beneath the surface of what we call a dull BDB recovery in developed economies is differentiated history for the three largest economies in the bloc: the U.S., Eurozone and Japan. We expect significant growth differences between them in 2010, which again may affect the currency, interest rates and stock markets. We see the U.S. as a leader among this group in the next year, with an average annual GDP growth of 2,8%. Euro area economy seems to show twice the smaller growth than the United States (1.2%), while Japan should grow by only 0.4% next year, and, thus, effectively re-enters the stage of technical recession in the first half of next year. One of the main reasons advanced dynamics of the U.S. lies in the fact that lack of credit affects less than the private sector, as banks (as opposed to capital markets) play a smaller role in financing the economy than in Europe or Japan. Another reason is that American companies were much more aggressive in the dismissal of workers this year than their European or Japanese counterparts, so the labor market in the United States will demonstrate the recovery (albeit slow) in the next year, while unemployment is expected to grow both in Europe and in Japan. In addition, European and Japanese exporters have to face difficulties because of currency effects, at the time, as U.S. exporters should benefit from the weakness of the dollar this year.
Moving toward the exit, the cycle of liquidity with the country rated AAA, remains unchanged: As mentioned above, we expect to start out of the super-expansionary monetary policy implications of the same will be the main theme of the macro economy in 2010. Next week we will discuss the details of the likely monetary exit strategy in different countries at the final annual meeting on global monetary policy. Suffice it to say that we expect from the Fed, the ECB, the People's Bank of China joint motion in the direction of higher interest rates in 3Q10, with the Bank of England, close to the 4Q. The central banks of countries such as India, Korea and Canada are likely to begin earlier, and such as Japan - will lag behind. Given the vulnerability of the financial sector, central banks would try to go gently, gradually and in a transparent manner, so that any body movements will be known in advance, partly developed by the relevant signals, and partly due to the partial use of bank reserves. It is important to note that, while weakening the end and beginning of release, will cause fluctuations in financial markets, and this is one reason why we see a sharp drop in bonds next year, it should be noted that official rates will probably stay below its neutral level (even domestic factoring, is likely to be lower than it was in the past) during 2010, and even in 2011. Thus, monetary policy will only go from "super-expansionary" to "remain quite expansionary." This can lead to what we call a cycle of liquidity AAA (ample - sufficient, abundant - plentiful, augmenting - multiplier), which we identified as the main driving forces in asset prices, economic recovery and good luck this year, ending in the next. Indicators, which we follow to confirm or refute this idea are our global measure for the measurement of excess liquidity, which is defined as operating money (cash and overnight deposits), held not by banks in calculating the nominal GDP. This figure exploded this year, and we expect further growth, albeit at a much lower rate during 2010.
Sovereign and inflation risks on the rise. The fifth and last main topic for discussion at the market in 2010 will be "sovereign risk and inflation risk." In our view, current issues related to the financial problems of Greece, still affect many developed (not developing) economies. We note that fiscal policy will remain expansionary in nature in all the major economies next year, and, as it should be, BBB-recovery will still need support. Nevertheless, markets are likely to worry about long-term financial sustainability, and rightly so. It is important to note that this is not about potential defaults of developed economies. It is extremely unlikely for one simple reason: most of the outstanding debts of governments with developed economies are in domestic currency. If (although unlikely), the Government will not be able to finance payments to repay the debt by issuing new debt through higher taxes or sales of assets, will be able to direct their Central Bank to print as much money as needed (you can call it quantitative easing). Thus, ultimately, the sovereign risk means the risk of inflation, rather than a direct risk of default. We expect that markets will increasingly pay attention to this next year, pushing inflation premiums and, consequently, bond yields are much higher. In other words, the next crisis is likely to be a crisis of confidence the government and the central bank's ability to take on increasing debt burden of the public sector, without creating inflation.
Morgan Stanley
December 18
December 18
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