Tuesday, November 24, 2009

>Prospects for Economies and Financial Markets in 2010 and Beyond (CITI)

After the most severe global recession for decades, we now expect a sustained but uneven global recovery. Almost all major economies exited recession in Q2 and Q3, and on balance our GDP forecasts continue to rise. The initial bounce in output is likely to be quite solid and even across major economies. Thereafter, we expect recovery to be uneven across regions: strongest in non-Japan Asia, slowest in Europe and Japan. For the US, a fairly solid recovery is likely in 2010-11 — despite lagging credit availability — but the medium-term fiscal outlook poses major policy challenges.

As recovery strengthens, many emerging markets — especially in Asia and Latin America — are likely to hike rates in H1-2010, with the PBOC’s first hike forecast in Q3-2010. Australia and Norway also are likely to tighten further in early 2010. But with subdued inflation and some residual worries among policymakers over recovery’s sustainability, we are postponing our forecast for the first Fed hike to Q4-2010 (Q2-2010 previously), and for the first ECB hike
to Q1-2011 (from Q4-2010). Rising inflation may still lead the UK MPC to hike in Q2 or Q3 2010, while we still expect the BoJ to keep rates on hold in 2010.

This month’s Overview highlights key themes for 2010 and beyond: a solid, but uneven recovery; why Asia’s quick rebound is sustainable; central bank exit strategies; bank retrenchment and credit availability; unsustainable fiscal trends; and longterm trends in the size of major economies. This month’s GEOS also gives detailed forecasts for a wider range of emerging market countries.

Returns from risk assets are unlikely to be as stellar in 2010 as in recent quarters. Nevertheless, Citi strategists believe that with improving growth prospects, strong corporate earnings, and gradual central bank tightening, risk assets will continue to do reasonably well — outperforming government bonds and cash — in the next couple of quarters. We expect interest rate term structures to normalise, with higher yields and flatter curves.

To read the full report: ECONOMIC OUTLOOK