Jed Brewer’s quarterly economic forecast
The leading economist predicts worldwide economic recovery will be a mixed bag with high levels of unemployment in advanced economies dampening the mood.
The global economy is recovering modestly from the depths of the Great Recession. Worldwide it contracted 0.5% 2009 – the first global economic contraction since the World War II era. As evidence of the widespread reach of the recession, only four of the G-20 countries that have reported 2009 data experienced growth last year. Today the story is more encouraging. All but one of the G-20 countries (Mexico) experienced reall output growth in first quarter 2010 from the previous quarter and altogether the International Monetary Fund in its latest World Economic Outlook predicts global growth of 4.25% for 2010.
The most striking detail we need to understand, though, is growth will be multi-paced. Emerging and developing countries will account for much of the growth the world economy observes. Advanced economies will lag behind as they continue to clean up bad loans, repair financial markets, and improve corporate and consumer balance sheets. Emerging and developing countries are expected to expand at an over 6% growth rate, whereas advanced economies will likely expand only between 2% and 2.5%.
Canada, Australia, and Russia will likely realise some of the strongest growth of the advanced economies. The UK, US, Japan, France, and Germany will attempt to hold their heads above water, and Ireland, Iceland, Spain, and Greece will have to deal with the reality of prolonged recession.
What concerns me most about advanced economies is while they may technically experience output growth, the social mood will continue to feel like it is in recession… and rightfully so. Unemployment levels are staggering relative to their levels before the Great Recession and they are going to remain elevated. Unemployment for advanced economies was 5.8% in 2008. In 2010, I anticipate it to be around 8.5% and in 2011 likely still above 8%. Unemployment in the Euro Area is presently over 10%, the US is above 9%, and the UK is roughly 8%.
High unemployment will continue to keep discretionary spending low and make paying back debt difficult. Banks on balance are no longer tightening lending standards but they are not really loosening them either. They are understandably being very cautious about the loans they make. Hence, total loans and leases are growing at meager paces and in some countries, such as the US, actually declining.
With large employment slack in the economy, low consumer spending, and credit tightness, inflationary pressures will remain muted for the balance of the year. Japan will observe outright deflation and the Euro Area will see considerable disinflationary pressure relative to norms, especially given the proposed austerity measures of some of its members.
The National Federation of Independent Business produces a survey of small businesses in the United States. It is called the Small Business Optimism Survey and I feel the US results sum up well the sentiments of many small business owners worldwide. Only 4% of small business owners see inflation as being the single most important problem. Meanwhile, nearly 30% of small business owners identified poor sales as the single most important problem. And we can see why. On net, 15% of small businesses are reducing selling prices – in the midst of a recovery.
In a robust recovery we would expect to see unemployment levels drop quickly, demand for products increase, and selling prices to start to rise. So I approach the data I see with mixed feelings. On one hand, I am pleased at the progress the global economy has made (modest growth sure beats large contractions). But on the other hand, I still remain unconvinced things are going to improve markedly in the near future. The downside risk is still the largest risk and I expect many advanced economies to see their growth rates slow in the second half of the year.
In such a frail environment history shows us it can only take the fall or unexpected disruption of one larger player to scare market participants and raise the spectre of a crisis.
It is still the time to operate optimistically but with caution. Keep a comfortable cash cushion in your business, seek value and yield in investments, and avoid closing deals that are dependent on asset price appreciation. The recovery for many advanced economies is fragile and the evidence suggests emerging and developing economies are still coupled to the health of the advanced.
Dr. Jedidiah Brewer is vice president of FRMC, Inc. (www.studygroups.com)
Jed Brewer: uncertain outlook
July 2010 Issue