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10 economic predictions for '10

Peter Switzer
8 December 2009

What follows are the top 10 economic predictions for 2010 from Nariman Behravesh, the chief economist at IHS Global Insight. I thought these are worth looking at as we get prepared for our 2010 investment strategy and attitude. (My comments are in italics.)

Here they are: 

1. The US recovery will start slowly.

The forecaster expects US growth to be stuck in a two to 2.5 per cent range for much of 2010. One of the biggest drags on spending by households will be the unemployment rate, which should move up to around 10.5 per cent during the first quarter.

Note, the Yanks got a fall in unemployment last Friday from 10.2 per cent to 10 per cent, which shocked many economists.

2. Europe and Japan will rebound more slowly than the US.

Europe and Japan suffered through deeper recessions than the US and are likely to see more modest recoveries. The Eurozone and the UK economies are expected to grow 0.9 per cent and 0.8 per cent, respectively, in 2010. Some West European economies — Iceland, Ireland, and Spain — will continue to contract next year as the aftershocks of the housing bubbles and financial crises take their toll. Japan, on the other hand, will do better with GDP growth of 1.4 per cent.

As you can see, 2010 will not be a big growth year for the global economy. Of course, you have to remember that doomsday merchants were talking Great Depression Mk II.

3. Most emerging markets — especially in Asia — will outpace the developed economies.

Growth in all the emerging regions will recover in 2010 and, with the possible exception of emerging Europe, will outpace the US, Europe and Japan. Non-Japan Asia will be at the forefront with GDP growth of 7.1 per cent. Latin America, the Middle East and Africa will see gains in the three to four per cent range. The laggard will be Emerging Europe, which will expand only 1.7 per cent.

The strength of non-Japan Asia is a great leg up for the Aussie economy next year as we are very much hitched to this powerhouse of economic growth.

4. Interest rates in the G-8 Economies will remain very low.

While some central banks (notably in Australia, Israel, and Norway) have already started to raise interest rates, the Federal Reserve, European Central Bank, Bank of England and the Bank of Japan are unlikely to raise rates before the third quarter of 2010. Nevertheless, some Asian central banks, notably the Reserve Bank of India and the People's Bank of China, may pull the trigger sooner—in the first or second quarters.

Overnight, the Fed Chairman, Ben Bernanke implied heavily that the Yanks wont be raising interest rates soon, despite the better than expected jobs report. That should keep the Oz dollar up and rising.

5. Fiscal stimulus will begin to ease.

Aggressive fiscal stimulus by some countries (especially the US and China) helped to cushion the blow of the financial meltdown a year ago. With that crisis now over, though, most countries have no plans for further stimulus and some are set to tighten (for example, the January boost in the value-added tax in the United Kingdom). Even in the US, where there is talk of a second stimulus package, there is no money for anything more than a symbolic attempt to relieve some of the pain from job losses.

This development is consistent with a recovering global economy — the more growth the economy produces the less government stimulus is required.

6. Commodity prices will move sideways

The extent of the recent rise in commodity prices cannot be justified, given the slow pace of the recovery. Some of the increase can only be attributed to investor activity. As such, IHS Global Insight and IHS CERA believe that oil and other commodity prices will likely soften in the coming months. Specifically, oil prices are expected to fall from current levels (in the US$75 to 80/barrel range) to around US$65 by next spring, before gradually moving above US$70/barrel by the end of 2010 as the global recovery picks up steam.

If this comes true this could take the steam out of the Oz dollar’s appreciation and hit some of our mining stocks as rising commodity prices help the share prices of relevant companies. Remember, none of this happens from day one in 2010 but it could be the trend and it could start when the US starts to raise interest rates, which could be mid-year.

7. Inflation will (mostly) not be a problem.

In most regions of the world, inflation will remain tame. Rising unemployment rates will put a big damper on wage increases and large amounts of excess capacity worldwide will limit the ability of businesses to raise prices. The only inflationary pressures will be in countries that are growing rapidly (mostly in Asia) and countries that peg (or closely tie) their currencies to the dollar (principally in the Middle East and Asia).

This is a good thing for Australia as we can be sensitive to imported inflation as we import quite a lot of capital and consumer goods such as cars, computers, etc. Lower inflation should slow down the Reserve Bank’s need to raise interest rates too fast.

8. After improving for a while, global imbalances will worsen again.

The deep US recession was a key factor in the current-account deficit plunging from more than US$700 billion in 2008 to near US$450 billion in 2009. Nevertheless, IHS Global Insight expects this deficit to widen by about US$90 billion in 2010. Some of this is because the US economy will be growing faster than most other developed economies. However, continuing dependence on export-led growth in several large economies (for example, Germany, China, and the rest of Asia) is also a factor.

These imbalances are the big question marks that could provide some challenges in the future. When you avoid a Great Depression by overspending, there has to be a price. I think that there will be relatively slower world economic growth and that should hit share price growth as well for a few years. We could still get say 10 per cent growth, which is okay if you get dividend growth but forget about 20 per cent plus growth, as we saw between 2004 and 2007.

9. While the dollar may strengthen a little, it Is on a downward glide path.

Given the slightly better prospects for the US economy, relative to those of Europe and Japan, the dollar is likely oversold. This means that there could be a slight appreciation in the coming months. However, given that the progress on reducing global imbalances has been temporary, the downward pressure on the dollar will continue. This downward movement is likely to be the greatest against emerging-market currencies because of stronger growth prospects in those economies.

This supports my view that the Oz dollar is likely to remain strong over 2010.

10. The risk of a "hard w" is still uncomfortably high.

There is about a one-in-five chance of a double-dip or "hard W" downturn. This could be triggered by any number of factors, including a premature tightening of fiscal and/or monetary policies, a major retrenchment of consumer spending in the face of rising unemployment, a sharp and sustained rise in oil prices (either because of a supply disruption or increased speculative activity), and the failure of a few large financial institutions. It would probably take some combination of these factors to drag global growth back into negative territory.

This isn’t really a “top prediction” but an each way bet. A top prediction would say that there would not be a double dip or there will be one. I guess the fact it is only a one in five chance should keep us tentatively positive about the US, in particular, and the global economy generally, as well as share prices next year.  

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

 


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