[OPE] Economic outlook 2008/2009

I think Morgan Stanley's forecast is pretty accurate (similar to Mark Weisbrot's):

. the recession we have expected for nearly a year has finally become a reality. The question now: Do these overwhelmingly negative results accurately foretell a much more severe downturn, or do they simply reflect the downdraft in market and economic sentiment? We think the analytical case for a deeper downturn is strong (see A Deeper US Recession Goes Global, October 6, 2008). First, recent data suggest that the US economy had already entered into a recession even before the recent intensification of the current financial crisis. Indeed, across a broad range of indicators including employment, income, consumption, and production, the economy has exhibited greater signs of weakness over the past few months. Second, a vicious circle of tighter credit conditions, deteriorating credit quality and plunging asset values likely will impair the US economy further. The continued deleveraging of the global financial system has led to severe dislocations in both money and credit markets and increased downside risks throughout all sectors of the economy. Finally, the financial turmoil and US downturn have both gone global. Consequently, we expect the strong support from US exports since the end of 2006 to fade rapidly, undermining the principal backstop for US growth over the past year (see Global Support for US Growth Is Ending, August 4, 2008). http://www.morganstanley.com/views/gef/index.html#anchor7043

In other words, the recession is amplified by the credit crisis, but not altogether caused by it.

Currency rate graphs http://www.internetional.se/images/usdintervention.gif
http://www.x-rates.com/d/EUR/USD/graph120.png

Headline inflation graph http://dallasfed.org/institute/update/2008/images/0802c2.gif

Some more useful graphs: http://dallasfed.org/institute/update/2008/int0806.cfm

Some commentators note also that the strengthening USD has not just to do with "risk-aversion" (investing in US bonds), a somewhat higher rating of output growth in the US and the consequent currency speculation, but also with the fact that the liquidity problems cause US-based entities to divest from foreign currency holdings to bridge the dollar cashflow gap. High volatility in stock markets is a speculator's dream, but no good for productive investment, and so IPO volumes are down also. In general, what data is available suggests average industrial profitability on invested production capital is declining in most OECD countries, while the dispersion of industrial profit rates seems to be increasing.

Jurriaan

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Received on Thu Oct 16 13:01:36 2008