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Lost … and not yet found
With interest rates heading towards zero and printing presses
being warmed up …
… the task is to bring to an end the worst economic crisis since
the 1930s …
… but debts are excessive and global contagion rife, suggesting
unconventional policies will struggle to make an impression
A truly global crisis
For a while, it was possible to pretend that the financial and economic crisis was merely a problem for the
major industrialised countries. Over the last three months, however, that theory has been blown out of the
water. We have made savage downgrades to our forecasts with some of the emerging markets bearing the
brunt of the bad news. On the basis of nominal GDP weights, we expect global GDP to shrink in 2009, an
extraordinary development in the modern era.
While the current crisis threatens to be as deep and as painful as the downswings of the mid-1970s and
early-1980s, the underlying causes are very different. Most obviously, the earlier crises were dominated
by concerns about inflation whereas deflation is the obvious risk today. Failures in the financial system
have led to increased monetary hoarding. Stuffing cash under the mattress, however, will only end in
cumulative tears: this, after all, was part of the dynamic associated with the Depression in the 1930s.
A sobering experience
Although we now know something of the scale of this crisis, a year ago forecasters were reluctant to slash
their forecasts. Back then, there was a strong belief that traditional policy measures would work. Our
analysis of forecast errors reveals that hardly any forecasters were able to gauge the scale of the unfolding
crisis. We’ve since discovered, however, that there are limits to the benefits of conventional policy, not
least because we’re seeing a massive reduction in the quantity of lending available, irrespective of the
level of interest rates.
The comparison with the 1930s is worth stressing if only to emphasise that policymakers are struggling to
keep the economic ship on an even keel. As with the 1930s, parts of the global economy are being
battered as a result of excessive debt, financial seizures, money hoarding, deflationary fears and, over the
last three months, international contagion.
A spreading problem
As banks try to improve their loan-to-deposit ratios and their Basel II capital adequacy ratios, lending is
in decline. Emerging markets dependent on international banking flows are vulnerable to this risk. A
simple ranking of vulnerabilities using data from the Bank for International Settlements suggests there are
specific risks associated with those countries which have seen large increases in foreign claims in recent
years (the Central European 3, China, India and South Korea) and which are facing rollover issues in the
next twelve months.
Of course, knowing that some countries are relatively vulnerable in the light of financial contagion does
not mean that they will necessarily end up the biggest losers. China, for example, has reacted to a sudden
and dramatic loss of economic momentum by launching a huge fiscal package which, given its current
account surplus and healthy fiscal position, carries considerable credibility. Nevertheless, our analysis
shows that emerging markets in general are at risk not just from a reduction in trade flows but also,
increasingly, from a diminution of capital flows.
The policy challenge
With interest rates edging closer and closer to zero, unconventional policies are making an appearance.
Although it seems we’re all Keynesians now, we highlight some of the obvious difficulties associated with
these weird and wonderful textbook tricks. One of the biggest problems lies in explaining precisely what
unconventional policies are likely to achieve, and by when. Central banks have invested a huge amount of time
and energy in making their policy choices as transparent as possible. The benefits of this approach are about to
be lost, such is our lack of understanding of how alternative policies are supposed to work.
The policy challenge
With interest rates edging closer and closer to zero, unconventional policies are making an appearance.
Although it seems we’re all Keynesians now, we highlight some of the obvious difficulties associated with
these weird and wonderful textbook tricks. One of the biggest problems lies in explaining precisely what
unconventional policies are likely to achieve, and by when. Central banks have invested a huge amount of time
and energy in making their policy choices as transparent as possible. The benefits of this approach are about to
be lost, such is our lack of understanding of how alternative policies are supposed to work.
Will it work?
Our forecasts suggest a return to stability, if not effervescence, through the course of 2009. However,
even if GDP levels off and possibly recovers, there will still be problems. Most obviously, we fear trend
growth will be lower, labour markets weaker and real asset values more depressed than might be
associated with a typical post-war recovery.
In the absence of model-based predictions of the likely effectiveness of unconventional policies, we
highlight some of the ways to tell whether, later in the year, policy is beginning to work, underlining
some of the key financial, lending, price and real data which are likely to be pivotal in calling for a
recovery. We note, though, that there’s a significant danger of false positives, in line with Japan’s
experience through much of the 1990s.
Buying and selling
Given all these uncertainties, investment recommendations are more than usually difficult. However, if
the US is at the forefront of monetisation, as seems increasingly likely, we suspect the euro will
increasingly be seen as an attractive safe-haven. It should be an out-performer in the year ahead. We
remain underweight equities, cautiously enthusiastic about high-grade corporate bonds (particularly if
governments and central banks start to buy this paper outright in a bid to narrow interest rate spreads) and
worried about further housing weakness. In asset allocation, we’re increasingly interested in spotting the
pricing anomalies which result from living in a world of tremendous uncertainty.
目录
Key forecasts 6
Monetary & fiscal policy
assumptions 7
Lost…and not yet found 8
The worst crisis in decades 8
Eating humble pie: the forecasting community’s
track record 9
A sobering precedent 10
Short-term pain, long-term drain? 12
Unintended consequences could be significant 13
Flows under threat 13
Rollover risk back on the radar 15
The policy challenge 17
Taking a quantum leap 18
Finding solace through quantum? 18
Japan’s problems 19
Indicating a recovery 20
Conclusions 22
Global economic forecasts 25
GDP 26
Consumer prices 28
Short rates 30
Long rates 31
Exchange rates vs USD 32
Exchange rate vs EUR & GBP 33
Consumer spending 34
Investment spending 35
Exports 36
Industrial production 37
Wage growth 38
Budget balance 39
Current account 40
Country and territory sections
US 42
Canada 44
Mexico 46
Brazil 47
Argentina 48
Chile 49
Eurozone 50
Germany 52
France 54
Italy 56
Spain 58
UK 60
Norway 62
Sweden 63
Switzerland 64
Hungary 65
Poland 66
Russia 67
Turkey 68
Saudi Arabia 69
South Africa 70
Japan 71
Australia 73
New Zealand 74
China 75
Hong Kong SAR 76
India 77
Indonesia 78
Malaysia 79
Philippines 80
Singapore 81
South Korea 82
Taiwan 83
Thailand 84
Vietnam 85
Disclosure appendix 86
Disclaimer 87
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