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Global Economic Forecast for 2009: Will Demand for Good News Outpace Supply?
After a year of financial shock and sharp economic loss, 2009 is likely to be extremely difficult for the global economy, with investors, business leaders and policymakers struggling to find signs of recovery, according to Wharton faculty and academic partners around the world.
"It's all pretty negative," says Wharton finance professor Franklin Allen. "The economy is going into a recession and my own view is that it will be deep and quite long-lasting. There doesn't seem to be anything on the horizon that is a bright spot."
In the wake of crumbling stock markets, mounting bad debt and rising unemployment, policymakers are scrambling to devise strategies to restore stability and lay the groundwork for new growth. "There's no country in the world that's doing well," Allen continues. "Everybody is doing badly, with large amounts of debt and heading toward deflation," plus "unemployment and a rush by companies to fire people."
The collapse in the United States is different than in other industrialized countries around the world because the problems began in the financial sector and spread out into the broader economy, says Wharton management professor Mauro Guillén. In the rest of the world, problems in the real economy -- created largely by trouble in the United States -- led to weakness in financial markets. "In the United States, the key in 2009 is, 'Can we clear up the mess in the financial sector?' Unfortunately, I'm not very optimistic," says Guillén.
Wharton finance professor Richard Marston says he is shocked by the impact of the crisis on U.S. financial firms and markets. "To see Wachovia, Wash Mutual, Citi all gravely wounded. It's extraordinary." Marston contends that while the banks have been shored up, they are unlikely to lend for a long time. On top of that, he adds, the inability to securitize will constrain credit more than if banks alone had cut back on lending.
Looking ahead, other shocks -- bankruptcies, bond defaults and additional job losses -- will buffet the economy, according to Marston. While markets have probably priced these events in, people will be shaken up when they actually occur, adding further jolts to confidence. He notes that during the 2001 recession -- which was not as serious as today's -- the economy turned upward in November, but large job losses continued through 2002. Worse, he says, demand remains depressed around the world. "This is our first world-wide recession in a long time. And the engine of past recoveries -- the American consumer -- is in the repair shop for an overhaul."
Businesses will hold back from investing until there is a revival of demand, he continues. "Where will demand come from?" asks Marston, who sees no obvious answer. "So I think the consensus in the press that recovery will start 'sometime in 2009' may be wishful thinking. We shall see."
John Percival, Wharton adjunct professor of finance, says the nation is still facing a mortgage crisis that will hamper recovery. He points out that while foreclosure rates are already high, many mortgages are due to reset in the coming years. Those mortgages may not be as shaky as subprime debt, but many are still likely to become problem loans. Further, he says, the commercial mortgage market is likely to start falling into default, and financial institutions will face problems with consumer credit.
"It's easy to say that this, too, shall pass. People are talking about 2009 being tough and things will turn around in 2010," says Percival. "I'm not so sure. It could be longer than that."
Allen predicts that unemployment will continue to rise and the economy will remain weak as consumers and businesses refrain from new spending until they are confident asset prices are no longer falling. "We need things to stabilize," says Allen. "The problem at the moment is that people don't know what their wealth is." Americans have no idea what their investment portfolios or real estate holdings are really worth and, as a result, are afraid to spend or make additional investments. "I think everybody is frozen with fear of losing their jobs and the rest of their wealth. There's huge uncertainty. Until that starts going away, until things stop getting worse, we'll keep going down."
Percival says the rate of consumption in recent years, fueled by easy credit and excess borrowing, was too much of a good thing for the U.S. economy. Ultimately, though, consumers will return to the malls, auto showrooms and the real estate market. "The consumer will be chastened for a while, but I can't see any dramatic change in the long run."
He notes that the emergence of bargain prices for stock in world-class companies is one positive note in the gloomy economic picture. "The prices you can buy these companies for are ludicrous. If you have some liquidity and a little bit of patience and a little bit of courage, there certainly are some wonderful buying opportunities out there."
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