BNY Mellon - Economic Update
We expect (1) a gradual calming of widespread concerns about an economic depression since we believe thatpolicymakers have a correct diagnosis of the financial and economic risks and are taking proactive monetaryand fiscal policy actions to reduce them in a basic policy stance of "whatever it takes," (2) the deepest U.S.recession, G-7 recession and global recession of the Postwar period, (3) rising unemployment rates andfalling capacity utilization worldwide, (4) global rebalancing with a drop in current account deficits inconsumption-led economies and a drop in current account surpluses in export-led economies, (5) domesticrebalancing, (6) proactive monetary and fiscal stimulus worldwide, (7) an increased supply of financial liquidityfrom the Fed's elastically expanding balance sheet, (8) a gradual recuperation of the financial sector as it moves from semi-orderly deleveraging to orderly deleveraging, (9) extremely low interest rates worldwide in the coming year, (10) the continuation of an intense global inventory liquidation in early 2009, which should ease as the year progresses, aiding the transition from recession to recovery, (11) a cyclical trough in the U.S. recession around mid-2009, followed by a sluggish economic recovery as deleveraging persists during the expansion, (12) a rise in the U.S. budget deficit in 2009 to about $2 trillion--12% or more of U.S. GDP, (13) a permanent upward shift in Federal spending as a share of GDP and persistently high budget deficits, (14) low inflation worldwide with brief temporary episodes of consumer price deflation due to the global recession and the past drop in commodity prices, (15) the avoidance over the next several years of both a sustained deflation in consumer prices and a major inflation acceleration, and (16) rising protectionist risks as global unemployment continues to rise. The above text is from our March 2009 commentary.
Our outlook remains basically unchanged. However, there are a number of recent developments, with respectto (1) a somewhat improved consensus about the global and U.S. economy, (2) higher commodity price levels,notably including energy, (3) growing concerns about high structural budget deficits and their potentialconsequences for future inflation and real yields, (4) reduced fears of deflation and rising concerns aboutpotential future inflation, (5) narrowed risk spreads in the bond market and a recovery in the stock market, (6)an intensified debate about money supply growth and the potential exit path from special liquidity programs,(7) an upward shift in long-term government bond yields even as short-term yields have stayed extremelylow, resulting in a steeper yield curve, (8) a continuing debate about global and domestic imbalances, and (9)concern about the outlook for the dollar. The main themes unifying these new developments are an easingof the financial crisis and reduced fears of a deflationary depression. As the consensus has started to abandon the superbear deflationary depression case, many markets have started to normalize. However, we disagree with the view that a quick return to a trend of accelerating inflation is likely. We believe that excess capacityworldwide is so great that the recent bounce in energy prices is unlikely to pass through into a broader rise ininflation. We believe that inflation fears are substantially premature.
