roughly stabilize by midyear, but only because of federalsupport for current and capital spending that we estimate at$171 billion over calendar years 2009 and 2010.The full
fiscal stimulus package
is valued at around $787billion over 10 years, and we assume that $561 billion of this is injected during the first two calendar years. Thestimulus adds about 0.9 percentage point to 2009 GDPgrowth and 1.2 percentage points to 2010 growth, and cre-ates or saves just under 2.5-million jobs by the fourth quar-ter of 2010. But the peak-to-trough decline in employmentis still well above 7 million.The stimulus package, financial bailout costs, and reces-sion will take the
federal budget deficit
to $1.6 trillion in2009 and $1.2 trillion in 2010. Beyond the recession,President Obama will face tough choices about his spend-ing priorities, and taxes must eventually rise. Failure to acton the deficit does not necessarily mean that inflationwould surge—but would guarantee that interest rates gomuch higher.The global recession has hit
exports
hard. They plunged ata 30.6% annual rate in the first quarter. Although there arenow signs that world trade is beginning to stabilize, we donot expect the U.S. recovery to be export-led. Apart fromChina, which has injected massive fiscal stimulus, recoveryshould come more slowly to the rest of the world. Thismeans that the trade gap will widen later this year, asimports pick up before exports, and will act as a brake onthe recovery, at least in its initial phases.The
dollar
has started to weaken again as its safe-haven bidhas diminished. We still see its long-term trend as down-wards. The
current-account deficit
should fall by aboutone-third in 2009 (from $706 billion to $478 billion), almostentirely because of a $215-billion plunge in the bill forimported oil. We expect the deficit to widen again in 2010.Rising commodity prices have eased fears of
deflation
, andthere is talk of
inflation
risks as some investors view themagnitude of monetary and fiscal stimuli with alarm. Wethink that some commodity prices—notably oil—havemoved in advance of the fundamentals, and see some cor-rection as likely. In addition, we see too much excesscapacity in product markets and, especially, in the labormarket for an inflation spiral to take hold any time soon. Inthe current quarter, we expect headline CPI inflation to beminus 2.0% year-on-year, largely on lower energy costs.We expect core consumption price inflation to soften andbottom out at 1.1% in the second quarter of 2010, near thebottom of the Federal Reserve’s 1-2% comfort zone.
Bond yields
moved much higher in June, into the 3.75-4.00% range for 10-year Treasuries, on a combination of reduced safe-haven demand, indigestion over heavy bondissuance, worry over future budget deficits, and concernover long-term inflation risks. Although we do see bondyields heading substantially higher over the long term, wethink it is too early for a major bear market to begin, sincewe see the economy as too weak and inflation as too distanta threat. Markets appear to have taken the same view, andyields slipped back to around 3.5% in early July.Inflation is a valid long-term threat, though, and willrequire
“
exit strategies
”
from both monetary and fiscalstimuli. But there is sufficient time available to plan a wayout. We do not expect the Federal Reserve to begin to raiseinterest rates until the second half of 2010. The more diffi-cult problem will be for the federal government to deal withthe budget deficit.
The Recovery: Different Shape, DifferentStrength, and Different Timing—Depending onWhere You Are in the World
While there is a growing consensus that the recovery is“just around the corner,” there has been little discussion of the rather disparate patterns of recovery in various parts of the global economy. The shape, strength, and timing of each recovery depends on a variety of factors, including: 1)resolution (or lack thereof) of crisis-related banking prob-lems, 2) the robustness of the policy response to the crisis,3) the level of private sector debt that needs to be workedoff, and 4) the relative dependence on domestic demandversus exports. Although major forces of recovery are inplace—lower commodity prices, bank rescue packages,massive fiscal and monetary stimulus, and growing pent-updemand—there are also significant headwinds that are like-ly to threaten the robustness and durability of the recoveryin each of the key world economies.
United States: Major Headwinds Will Make for a Slow-Starting Recovery.
Arguably, the United States is one of
U.S. ECONOMIC SERVICE
Executive Summary
3
IHS Global Insight
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