The Global Economy in 2009
Richard Urwin, Head of Asset Allocation & Economics in the BlackRock Multi-Asset Portfolio Strategies Team, assesses the prospects for the global economy in 2009
As 2008 draws to a close, corporate treasurers and CFOs may be forgiven for looking at 2009 with some trepidation. Financial markets still face extreme levels of volatility, the financial system remains under severe pressure and we continue to see leveraged investors being forced to sell assets. On the wider economic front, the secular market dislocation we have just witnessed has lead to a real dearth of credit for companies and a severe economic downturn. It is no exaggeration to say that demand collapsed during the third quarter of 2008. Some companies have reported unprecedented negative operating conditions. The sudden deterioration in a range of key economic indicators tells a similar story.
And the good news? Precious little, except that the inflation concerns evident in the middle of 2008 have now disappeared, although concerns over deflation – which have remained in abeyance for five years or so – have begun to re-emerge.
So will 2009 bring more of the same or are we getting closer to the point of maximum pain for the global financial system and the wider economy, albeit with a long healing process ahead?
What are the conditions necessary for a recovery?
At this stage, it is unclear when a trough may be reached. The most likely outturn, however, is that growth will weaken until about the middle of next year, followed by an extended period of sluggish growth. However, this course of events is far from inevitable and much depends on the extent to which the factors generating the downturn are reversed. So what needs to happen for a ‘benign’ recessionary outcome - not too long and not too deep – to materialise? In practice, four conditions are necessary to facilitate this scenario:
- A substantial easing in interest rates;
- A supportive fiscal policy;
- A sustained fall in the prices of the major commodities;
- A significant improvement in money market liquidity in the form of lower spreads and a reduction in the role of central bank intermediation.
While the first three conditions are highly likely to be met, the prevailing illiquidity in a number of key capital markets, means that significant progress needs to be made in this area for a cyclical trough to be reached at some stage next year.