Click on chart to enlarge, courtesy of Deutsche Bank.
Some market participants worry that a slow-down might turn into a “double-dip” recession (with real GDP falling again for two or more consecutive quarters). While this possibility certainly should not be ruled out, we see a number of reasons why a “double-dip” is not the most likely outcome:
First, the move towards fiscal policy tightening appears generally to be relatively measured ... This year, we expect the euro area and China to run somewhat expansionary fiscal policies while the other countries are likely to embark on some fiscal restraint. Next year, almost all countries are forecast to tighten policy, but the contractionary fiscal impulse seems fairly modest in most cases. The UK does show a substantial fiscal drag in 2011, equal to about 2-1/2% of GDP, and in the US it reaches 1-1/2% of GDP, but for other major areas (euro zone, China, and Japan) it is generally 1% of GDP or less, not enough to induce a serious downturn, in our view.
Second, while fiscal policy is tightened, we expect monetary policy to remain expansionary. 1 [Look for footnote below] Earlier expectations of an exit from the low interest rate and non-standard monetary policy have been shifted well into 2011 (affecting growth only as of 2012).
Third, with discretionary spending on durables and structures already having fallen to recent historical lows, this key driver of economic downturns has much less room to be compressed than it did before the crisis began (Chart 3). Indeed, this is one reason double dip recessions are so rare. The more and the longer such spending is compressed, the more pent-up demand builds to support the eventual expansion. Durable goods that have worn out eventually need to be replaced.
Fourth, with pent-up demand beginning to show through into consumer and business spending, we believe that the economy is developing sufficient momentum through 2010 to deflect the upcoming headwinds to a significant degree. A positive feed-back loop between investment, employment, and consumption seems to have emerged in most major countries.
1 Those forecasting a double-dip recession point to the experience of 1938, when the US economy fell back into recession after its recovery from depression in 1934-37. However, the recession of 1938 went along with a sharp drop of money growth as the Fed began to tighten policy. We do not expect any policy tightening comparable to this in the foreseeable future.
Fear-mongering only? Some, though, see e.g., monetary tightening, summer breaks by consumers ...
Another set of latest macro prospects by Credit Agricole, if you wish!