Global outlook (Crikey post)

If not for the drastic downward revision of expectations that has taken place since the financial meltdown of September-October 2008, the Budget’s forecasts for global economic conditions would look exceedingly gloomy. As it is, they look to be based on a fairly rosy scenario, in which advanced countries experience a GDP contraction of just under 4 per cent in 2009 before stabilising in 2010 and recovering in 2011.

The prospect of a complete collapse in the global financial system, very real until a couple of months ago, seems to have been averted. Risk measures such as the LIBOR spread have returned to normal levels, and, for firms and households with strong balance sheets and a desire to invest, credit is available. Taken at face value, the reports from the ‘stress testing’ of US financial institutions suggest that the major banks can be returned to a sustainable position without the need for full-scale nationalisation.

Although complete collapse now seems unlikely, the prospect of a long period of depressed growth, similar to Japan in the 1990s, cannot yet be dismissed. The stress tests, produced after considerable negotiation between the banks and the US Treasury, represent a statement of hope rather than a coldly objective assessment.

Closer to home, there are similar concerns with respect to our Asian trading partners. If their recovery is delayed, the same will probably be true here. And if the Chinese economy falls into recession, the impact would be very serious.

There is some potential upside. A stronger than expected recovery in the US and the adoption of more expansionary policies in the eurozone could see the global economy outperform the Budget estimates. But, overall, the global economy presents more risks than opportunities.

Hard Target buy

26 thoughts on “Global outlook (Crikey post)

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