Economic Base Case
I’ve been very busy for the last few days at work.
Hopefully normal service will return next week but in the meantime, I take the following bullet points from our latest presentation to investors at work.
I generally try to avoid making precise economic forecasts – it’s a way of making oneself look silly. But this represents my ‘base case’ on the economy for the next few years. What I think is likely to happen, rather than what I desire to happen.
- The worst quarterly declines in GDP are behind us.
- Extraordinary fiscal & monetary policies have hopefully prevented a prolonged deflationary slide.
- Global growth will come from inventory re-stocking in the West and consumption/investment in the East.
- Capacity utilisation is at record lows, and still falling in Europe, the UK and the US – hence inflation is unlikely.
- Private sector capital expenditure is extremely weak.
- Fiscal policy expansion stop by late 2010/11, given large budget deficits and debt/GDP ratios and political pressure.
- Deleveraging by banks, companies and consumers is only just beginning. Corporate and household debt levels will fall and savings rates rise.
- Once the fiscal policy stimulus is withdraw, and the inventory restocking complete, the West is likely to dip back into recession by 2011.
- Bear Case: If deflation becomes more deeply entrenched (still a risk), then the (Anglo-Saxon)West faces a ‘balance sheet recession’ and a Japanese style ‘Lost Decade’.
- Bull Case: A strong upsurge in corporate investment could cause private sector GDP to start growing before the stimulus is withdrawn.