>Global Economic Outlook & Strategy (CITI)

From the Emergency Room to Intensive Care

■ Conditions in the global economy are looking marginally better. After five months of declines in output and trade that rival the Great Depression, current data point to a slowing pace of contraction in the global economy and a better tone to financial markets.

■ This is consistent with our forecast of recovery later this year or early next, depending on the country. But, this forecast requires further improvement in financial conditions and success in the next stage of financial stabilization — greater transparency on the quantity of losses and how they will be absorbed.

■ In the United States, monetary policy actions appear to be gaining traction and, along with fiscal stimulus now taking effect, likely will buoy demand. Nonetheless, risks of deflation still remain somewhat elevated.

■ In the euro area, the sharpest contraction probably has already passed but the recession is unlikely to end any time soon. We expect the ECB to stop rate cuts at 1% in May and to continue gradual monetary easing with unconventional measures.

■ In Japan, prospects for private domestic demand remain bleak but economic activity likely will stabilize in the second half of 2009, thanks to progress in inventory adjustment and the new economic stimulus package.

■ China’s recovery is gaining momentum, supporting our expectation for 8.5% growth in the second half. Other emerging markets have responded favorably to the G20 decisions, but fiscal concerns have risen in a number of countries thanks to the impact of the slowdown.

To see full report: ECONOMIC OUTLOOK