Harjeet Kakkar :
Event: Group discussion for management trainee selection
Topic Global recession ..reasons and impact on India
Answers were interesting … i would like to share them with the web world
1. Osama ( she meant obama) does not want outsourcing to India
2. Obama wants to keep all jobs for black Americans
3. Banks in usa gave huge loans to India and china which they could not repay
4. Iraq war has driven usa bankrupt
5. Usa has printed lots of fake currency without gold standards causing inflation
6. American banks gave lot of loans to citizens without paperwork and they defaulted
7. America has no black money to support its white economy
8. China has caused usa bankruptcy to be a superpower
9. There were no rains in usa this year causing food shortage and inflation ( this one I liked the best)
10. People in usa take home loans but spend them else where on good food and clothes.
I can go on and on . Youth of today. They would browse the net for hours for all sorts of info. But young MBA’s had no clue . In the end i made an open offer . Anyone who answers “What is sub prime mortgage crisis?” gets a job right away.
126 answers …all wrong , weird and hilarious.
god help the world ..:)
1:10 AM 188 views 4 eprops 2 comments recommend
Comments (2)
Subprime crisis happens because everyone thinks that the rate of properties will increase over time. The economy is not very simple as it used to be many years ago when the future can be predicted very easily. Since the housing rates are following the borrowers are not able to pay back the debt that they have recieved and they faulter on the payment of loans.
12/5/2008 3:48 AM johnniesamuel (message) reply a period of reduced economic activity..Economic activity spread across the economy,
more
2009 Global Economic Outlook
December 19, 2008
By Richard Berner (New York) and Joachim Fels (London)
The financial crisis will continue to play out in 2009, with serious repercussions for the global growth and inflation prognosis. Downside risks prevail for both, so that deflation is a bigger risk than inflation. We expect just 0.9% global growth in the coming year, matching the weakest year on record (1982). But with policymakers resolved to do whatever it takes to end the crisis, recovery seems likely. The issue will be how long it will take to stabilize credit markets and thus economic activity. Our best guess is that the credit markets are beginning to improve, but the process will not be speedy. As a result, recovery will be slow in coming and moderate at best in 2010.
Risks to the Global Outlook: The Good, the Bad and the Ugly
A Deeper Slump Triggers Aggressive Policy Responses
Risks to the Global Outlook: The Good, the Bad and the Ugly
December 19, 2008
By Richard Berner (New York) and Joachim Fels (London)
Cutting Forecasts; Downside Risks Remain
We are sharply cutting our outlook for global growth and inflation in 2009 for the sixth time in seven months, this time to 0.9% and 2.6%, respectively, from 1.7% and 3.9% in November. And the 2010 recovery is likely to be moderate, despite unprecedented global policy stimulus. Our baseline view takes growth back up to 3.3% in 2010, with inflation at 3.7%. If that outlook is realized, global growth in 2009-10 would be the second weakest in the post-war period, barely stronger than in the deep 1982-83 downturn.
Global Forecast at a Glance
More importantly, downside risks persist as a global credit crunch and falling asset prices ripple through the economy. Indeed, incoming data around the globe indicate plunging economic activity and prices in October and November, pointing to a severe global recession and a real deflation scare. Courtesy of globalization, this recession has spread quickly, undermining any cushion of support from abroad for the US economy or vice-versa and intensifying the adverse feedback loops. Given the strength of economic headwinds, even ultra-aggressive policies seem unlikely to promote a vigorous rebound soon.
If the risks still point to the downside, why not simply cut our estimates to the point where those threats are balanced? There must be a better way to assess the balance of risks than by extrapolating the evolution of our forecasts from month to month.
A Framework for Assessing Risks to the Outlook
We think there is a better way: Assess and quantify the risks to the outlook systematically in advance. In this note, we provide a framework to meet that goal, thus providing investors and our colleagues with a sense of forward-looking plausible risk scenarios around a baseline (see The Method to Our Madness below for details on the methods, on specific risks, and on regional differences).
Globally, we believe that there are five key drivers of risk: First, the extent of deleveraging by leveraged lenders remains uncertain, and further write-downs and provisioning will intensify the credit crunch in several developed economies. The extent of further declines in asset values, especially in real estate, will deepen those risks, especially for US consumers (see “Perfect Consumer Storm to Last at Least Until Mid-2009”, Investment Perspectives, November 20, 2008). Second, many central banks have eased monetary policy aggressively and quantitatively, but it is unclear whether and when such policies will get traction. To be sure, there are recent signs of a revival in liquidity and money growth (see “More Action, Some Traction”, The Global Monetary Analyst, December 3, 2008). However, monetary policy in many EM economies remains restrictive.
Third, officials, notably the incoming Obama Administration, are considering a massive step up in fiscal stimulus, with an undetermined amount in infrastructure outlays and tax cuts. The timing, size, and economic effectiveness of such policy actions are likely to remain unclear for a while. Next, swings in currencies, commodity prices and risk premiums matter for the outlook in many EM economies (see Latin America: Shocking the Consensus, September 22, 2008). Finally, the extent of the real estate downturn in China is a critical risk factor for that pivotal economy (see Outlook for 2009: Getting Worse Before Getting Better, December 9, 2008).
The upside and downside results from those scenarios provide a very different perspective compared with the baseline. In our ‘ugly’ scenario, global activity contracts by 0.8% in 2009 and recovers by only 1.3% in 2010 as economic headwinds dominate policy stimulus. Given that we think of global recession as growth below 2.5%, the ugly scenario would border on something even worse than the most severe recession in the postwar period. In contrast, the ‘good’ scenario involves 2.3% growth next year and 4.4% in 2010, as a massive range of policy actions overwhelm the downturn.
Unfortunately, the good-ugly comparison reveals that the downside risks outweigh the upside odds. The margin is not large in 2009, where growth in the bear case falls short by 1.7 percentage points of the baseline, compared with a 1.4 percentage point gap between the good outcome and the baseline. But the downside margin of risk widens in 2010 to 2 to 1 (the ugly outcome is 2 percentage points below the baseline, while the good outcome is only 1 percentage point above the baseline).
Policy Paradox: Near-Term Downside Risks Promote Recovery in All Scenarios
Two factors skew the distribution of risks to the downside. First, while ‘tail’ risks (low-probability, high-impact events) lie outside the range of plausible outcomes, they shape the continuum of risks within that range. In our view, depression and deflation – defined as periods of two years (or more) of declining output and prices – are today bigger tail risks than the return of a global boom and inflation. Second, the credit crunch is powerful, and policies have been reactive rather than preemptive. As a result, deleveraging, risk aversion, and the near-term cyclical dynamics of recession are likely to offset policy stimulus for now.
Depression and deflation are important tail risks because, if left unchecked, the credit crunch could trigger severe consumer and business retrenchment. But they are highly unlikely for two reasons. For one, we see some economic excesses outside of real estate as more limited than in past periods, as a result of more limited global connectivity and supply-chain management. Most important, we believe that misguided policies deepened the Great Depression and Japan’s crisis, and we have learned three lessons from those events. First, aggressively use macro policies to buy time for other steps to take effect. Second, implement policies to stabilize the financial system and attack the root of the credit crunch. Finally, adopt measures to reduce the imbalances that triggered the downturn (see “Neither the Great Depression Nor Japan”, The Global Monetary Analyst, November 19, 2008).
Indeed, we believe under all our scenarios that aggressive policy will eventually gain the upper hand. That holds even in the ugly scenario for 2010. A premise of our risk analysis framework is that the policy responses and policy traction are critical determinants of the outlook in 2010: Put simply, the weaker 2009 proves to be, the more aggressive will be the policy response, including that from officials who have thus far been laggards.
Inflation Risks: Counterintuitive Skew
Finally, the risks to inflation are – somewhat counter-intuitively – tilted in the other direction from those to growth. Normally, massive economic slack would be associated with higher deflation risks. Make no mistake, our baseline and near-term scenarios encompass sharp declines in inflation outcomes globally. However, four factors make deflation unlikely: First, the current inflation decline largely represents a reversal of the inflation spike of early 2008, rather than the beginning of a new era. Second, we think that companies will quickly cut excess capacity to balance supply with demand. Third, some of the emerging global declines in goods prices are clearly declines in relative prices, not prices generally. This shift in the ‘terms of trade’ benefits consumers and most businesses, even in commodity-producing countries. The vital element to keep in mind is that the Fed and other central banks are easing aggressively and in some cases now quantitatively to influence inflation expectations.
Indeed, now there are three important factors that lead to upside asymmetry for inflation risks around the baseline. First, we believe that low oil prices will sow the seeds for higher prices down the road. Supply cutbacks should put a floor under prices at $30 or so, and when demand rebounds, supply will be slow to come back on line. Moreover, in developed economies, there is a risk, albeit a small one, that policy stimulus will overstay its welcome, eventually (beyond 2010 in our view) leading to renewed inflation concerns. Finally, in developing economies, poor growth outcomes in the short term are leading to further currency weakness, pushing up inflation at least over our two-year time horizon.
Regional Risks: Developing Economies Are Higher Beta
These risk drivers can differentiate economic (and earnings) risks across regions. While the US economy is at the center of the deleveraging dynamic, and thus likely will experience the deepest recession, the dispersion of risks for emerging market economies is wider than for the developed world. That’s appropriate because EM economies are more highly leveraged to global growth through trade, capital flows and commodity prices. In addition, many EM policymakers are still concerned about inflation risks following sizable currency declines. Delayed policy responses will increase downside risks to growth in both EM and developed economies like Europe and Japan.
As noted earlier, the risks for inflation in the developing economies are skewed to the upside around a near-term declining baseline. In contrast with GDP, where the risks are slightly tilted to the downside, for inflation the upside in the bull case is higher than the downside in the bear case. That reflects two factors: First, supply constraints in oil and other commodities limit the downside in the ugly scenario and push commodity prices even higher in the bull scenario. Second, in the bear scenario, falling exchange rates offset declines in EM inflation from other sources. In turn, such dynamics support our LatAm and Asia EM teams’ case that EM central banks have less latitude than the G7 to ease monetary policy. Over the long term, that issue will fade in importance as these countries develop further, become less dependent on commodities and external sources of growth, and their markets become more flexible. But for now, it perversely will boost inflation risks around the baseline.
The Method to Our Madness
A Framework for Assessing Risks to the Outlook
To assess risks, we analyze the impact on growth and inflation of a handful of critical, plausible alternative scenarios. Until now, our assessment of the width, skew, and fatness of the tails of the distribution around our baseline forecast has been subjective. Here, we adopt a more systematic approach by looking to key drivers in each region and to the most important common global factors that could cause change. Plausibility is defined to cover outcomes roughly one standard deviation from the mean in either direction. Our methodology involves shocking key drivers of risk for each economy or region and aggregating the resulting upside and downside scenarios into consistent global outcomes. For the US, those drivers involve different paths for home prices, different rates of loss among lenders, and more or less aggressive policy actions and their effectiveness. For Europe and Japan, policy actions are critical; for China, it is the performance of real estate. For Latin America, the shocks come through currencies (and the response through interest rates), commodity prices, and risk premiums.
Considering variation in commodity prices as a risk driver complicates risk analysis for two reasons. First, the weakness in demand that has promoted the recent collapse in commodity quotes is clearly bad news for emerging-market commodity producers. However, it is a welcome cushion for the perfect storm now battering the American consumer and by extension other consuming countries. As a result, these massive changes in the “terms of trade” are bane to some but boon to others, and their consequences for global risks must be netted from that interplay. Second, it is critical to assess the source of the change in commodity prices: Today’s plunge is primarily the result of weak demand, so it would be misleading to look at the drop as a new source of global stimulus. Conversely, if it results from increased supply, the effects on global growth likely will be positive. Indeed, we estimate that if an increase in supply allowed crude quotes to decline to $30/bbl, global growth would be roughly 0.5 percentage points stronger than in the ugly scenario (or -0.3% rather than -0.8%), and global inflation would decline by 0.3 percentage points (to 1.5% rather than 1.8%).
In what follows, we outline region-by-region risks and risk drivers:
United States – Our baseline outlook assumes that home prices (FHFA purchase-only home price index) decline by another 10% for a peak-to-trough total of 18%, and uses MS large-cap bank analyst Betsy Graseck’s estimate of $1.4 trillion in cumulative losses for the US financial system. We assume a $500 billion fiscal stimulus package spread over three years. The bear case assumes that home prices will decline by an additional 7%, that cumulative losses total $1.7 trillion, and that monetary and fiscal policy efforts take four months longer to be effective. Moreover, we assume that consumers save 10% more of the tax cut than otherwise. The bull case assumes home prices decline by only an additional 5%, cum losses amount to $1.3 trillion, the fiscal stimulus is $700 billion, and monetary and fiscal policies begin to get traction in the spring of 2009.
Euro Area – Our bear case (30% subjective probability) incorporates a domestic demand crunch caused by several factors. First, a noticeable reduction in the availability of credit to the non-financial private sector, rather than our baseline assumption of a gradual tightening in credit conditions and credit availability in line with a typical recession. Second, instead of easing slightly as in our baseline, the household saving rate could start to rise noticeably. Third, faced with a sharp deterioration in budget dynamics, governments might find it more expensive to fund themselves and private investment projects could be crowded out. Fourth, effective funding costs might go up considerably compared to our baseline of an ECB refi rate cut to 1.5% and a gradual easing in the Euribor/OIS spreads. In our bull scenario (10% probability), financial conditions become noticeably more favorable, fiscal policy achieves major multiplier effects, global growth surprises on the upside, and commodity prices on the downside. The sharp fall in many activity indicators in recent months would be seen as a sign of a proactive corporate sector that was fast to slash production, managed its supply-chain efficiently and made full use of the flexibility of temporary staffing.
United Kingdom – Our bear scenario assumes that the low household saving rate follows a trajectory similar to the recession of the early 1990s, rising sharply at a time when global growth is well below trend, so that reductions in domestic consumption are not offset by stronger growth in exports. A sharp and protracted fall in output would be inevitable. This risk is not our main forecast because we are not seeing the sharp rise in interest rates that helped drive the household saving rate up dramatically in the early 1990s. A more benign path than our base case is one where the "lost" output from 2008 and 2009 is not permanent because the supply side is not damaged by the credit crunch and activity bounces back strongly in 2010 to trend. It seems optimistic to assume that the severe damage to the financial system does no lasting damage to productive capacity.
Japan – The main downside risks to our base case are a political crisis and protracted policy gridlock after the snap elections, and a policy-induced slump of construction investment (again) just like the housing shock in 2007. Our bull scenario envisages a sharp improvement of terms of trade, which could reduce the outflow of real purchasing power and unleash pent-up consumer demand.
New Zealand – The key drivers for the bear scenario are (i) even weaker growth in trading partner economies, damaging export prospects further, and (ii) a sustained decline in house prices, which would prolong the recession.
China – Despite much attention paid to the G3 recession, we think the biggest swing factor for 2009 growth is real estate investment. Our base case (65% subjective probability) envisages a 6% decline in real estate investment by the private sector in 2009. If real estate investment were to contract by 30%, the impact would be so large that even the current fiscal stimulus package would not make up for the growth shortfall. We estimate that GDP growth would drop to 5%, tantamount to an outright hard landing. Under this bear case scenario (25% probability), consumption growth would likely be significantly lower as both employment and income growth would suffer. Our bull case (10% probability) envisages a larger contribution of net exports to growth because of less-deep-than-expected recessions in G3, as well as flat instead of reduced real estate investment. We estimate that GDP growth could reach 9.0% under this bull case, provided that the fiscal stimulus package would not be scaled back.
Korea – While many are focusing more on export and construction, we see consumption as the biggest downside risk due to household de-leveraging, wealth destruction and currency depreciation. Our bear case assumes domestic liquidity problems as foreigners continue to sell Korean bonds, squeezing wholesale funding further. The dollar shortage could re-emerge if a majority of ship orders are cancelled and shipbuilders cannot meet their external debt payment with trade credits. The upside risk depends on the effectiveness of China's stimulus measures as Korea's growth is heavily related to China's fixed asset investment.
Taiwan – The biggest downside risks stem from any delay in monetary and fiscal policy execution next year and further loss of competitiveness to Korea due to currency appreciation vis-à-vis the Korean won. The main upside risk depends on global demand for Taiwan’s technology exports.
Russia, Kazakhstan, Ukraine – For the former Soviet Union commodity prices remain the key external driver of risk scenarios. Russia and to a lesser extent Kazakhstan have temporary scope to cushion the downturn with fiscal expansion, but through much of the region monetary policy will have to be further tightened into the slowdown given the risks of deposit flight from fragile banking systems. IMF programs are likely to defend currency pegs in the Baltics, at the expense of a deep contraction, but to drive further depreciation in Ukraine. The sharp recovery in steel and oil prices seen in our central case scenario would bring rapid relief in the CIS in 2010.
Central Europe – Downside risks to growth and inflation dominate even after our recent downgrades. Open economies exposed to the auto sector (Hungary, Czech) are particularly at risk from a growth standpoint. Rates are being lowered everywhere, but the strength of the monetary transmission channel has weakened in the last few years due to increased loans in foreign currency, especially in Poland, Hungary and Romania. Fiscal policy does not have much scope to cushion the blow, and fiscal positions are set to deteriorate in 2009 on the back of lower growth. In Hungary in particular, the fiscal squeeze associated with the recently approved IMF package will provide an extra blow to consumers, in addition to slower credit and export growth.
Israel – The Bank of Israel’s pre-emptive policy easing and the government’s planned fiscal stimulus package should limit downside risks to some extent. However, an even sharper than expected decline in exports and easing domestic demand present downside risks. The absence of a housing bubble and sound fiscal policies are mitigating risks to a large extent, but upcoming elections might result in some policy slippage.
Turkey – The main risk rests with external financing, particularly the ability of the private sector to roll over debt. The expected decline in current account deficit and the funding from a possible IMF stand-by arrangement are likely to help close the potential financing gap. Protracted weakness in global markets may cause local depositors to switch back to foreign currency deposits, resulting in a noticeable depreciation in the currency. But the central bank has started to ease monetary policy and there will be limited support for small to medium sized enterprises that could prevent a recession.
South Africa – Risks are asymmetrically skewed towards the bear case of weak GDP growth and sticky inflation. Continued weak global growth prospects and a commensurate dearth in capital flows would keep the currency on the back foot, given the huge current account deficit. A recovery in global growth through 2010 would likely see oil prices rise sharply enough to prevent the SARB from cutting rates aggressively, thereby capping domestic growth prospects.
United Arab Emirates – The risks to near-term outlook are driven by: (i) the oil markets; (ii) the domestic real estate sector; and (iii) the availability of foreign financing. Although both fiscal and external accounts are expected to remain balanced at oil prices of about $40 per barrel, continued weakness in oil markets may lead to further output cuts, an adverse effect on oil sector growth, more moderate growth in public investments, and lower exports of services to neighboring oil-producing countries.
Latin America – Although we now expect Latin America to contract by 0.4% in 2009, we are concerned that the downside risks still dominate. The good news is that the starting point for Latin America has improved from the past: the region does not suffer from the same kind of current account imbalances or fiscal shortfalls as in the past. However, we are concerned that policy makers have less room to engage in counter-cyclical fiscal and monetary policy to temper the blow of the downturn. For the bear case, we assumed the nominal exchange rate depreciates by two times the 10-year standard deviation of the real effective exchange rate. We used a standard set of “bear case” commodity prices from our colleagues on the commodity research team as additional inputs. For the risk premium (spread over US Treasuries), we used the 10-year average. We then estimated implied interest rates and GDP growth (for more details see “Latin America: Shocking the Consensus”, This Week in Latin America, September 22, 2008). For the bull case, we have largely used the previous “base case” before our first revisions downward in October 2008 (see “Latin America: The End of Abundance”, This Week in Latin America, October 6, 2008).
December 19, 2008
By Stephen Jen & Spyros Andreopoulos London
In 2009, assuming that the global economy finds a trough by summer, we see the dollar rallying further into the trough, but underperforming most other currencies as the world recovers in 2H. The swings in the global business cycle will likely be the dominant driver for the dollar. Other factors such as US government debt sustainability and the US inflation outlook associated with the Fed’s QE (quantitative easing) operations will likely be secondary considerations, mainly because we believe that US Treasuries will remain well-supported and a flare-up in inflation is not a probable risk.
There is no official change to our forecast and we continue to look for EUR/USD to dip to 1.10 by 2Q, before recovering to 1.20 by end-2009. USD/JPY will likely exhibit a similar U-shaped trajectory, dropping to 85 by 2Q before rising to 100 by end-2009. Most EM currencies will likely experience intense depreciation pressures vis-à-vis the USD in 1H. Differentiation at the EM country level will likely be unproductive in the sell-off phase. But in the recovery phase, country-specific factors will likely drive a wedge between the currencies of the ‘good’ from the ‘bad’ economies.
Resurrecting our ‘four seasons’ framework. In thinking about how currencies might be affected by large swings in the global business cycle, it is important to consider both the real economy and the financial side (the buoyancy of global equity markets). In other words, exchange rates are not only functions of relative economic growth, but are also sensitive to general levels of risk appetite, which are correlated with the buoyancy of world equity markets. Since financial markets tend to be ‘forward-looking’ and anticipatory, when the world plunges into a recession, earnings forecasts are cut, risk-taking curtailed, and equity prices decline ahead of the actual contraction in economic activities.
To help us think about the implications for currencies, we first calculated the historical correlations between various currencies (vis-à-vis the dollar) relative to economic growth and the equity markets. Different currencies tend to perform best in different ‘seasons’, or ‘comfort zones.’ We suggest that high-beta currencies such as many of the AXJ currencies belong to summer or the spring quadrants, while the currencies of large capital-surplus countries, such as JPY and CHF, should be in ‘winter’ or ‘fall’. By and large, simple correlations of exchange rate performance relative to global growth and global financial market buoyancy are consistent with these broad prejudices. The distance of these currency cells from the origin denotes the size of the elasticities.
We believe that EUR and CHF should underperform the dollar as we enter the ‘winter’ quadrant, due to European and Swiss banks’ exposure to Eastern Europe. JPY, on the other hand, could be supported by acute repatriation flows as we head into ‘winter’.
Call 1 — The dollar to strengthen first, and weaken later. At the turn of each year, there is a temptation for analysts like ourselves to make one call on the dollar for the entire calendar year (i.e., a strong or weak dollar ‘year’). However, more often than not, currencies don’t change trends on January 1. 2008 is a good example: The dollar did not begin to show strength until May against AXJ currencies and until July against the EUR. In the first few months of 2008, the dollar was extraordinarily weak. For 2009, we see the opposite trends: dollar strength in the first months, followed by possible dollar weakness in 2H. We see the world toggling through ‘winter’ and ‘spring’ in 2009, with a risk that ‘winter’ may last longer than 1H, and ‘summer’ may come in 2010 or later. Thus, we will be buying dollars and JPY into 1H, but with a view to flip our positions some time in 2Q in anticipation of a global economic recovery.
Call 2 — EM currencies will be stressed in 1H. The global EM currency ‘moment’ is not over, in our view. In fact, the process is roughly halfway complete. We see weaker Latam currencies in 1H09. Pressures on AXJ currencies will likely persist, as these countries’ exports collapse and their central banks cut interest rates. We believe that even the CNY will be allowed to weaken against the dollar in coming months. Eastern European currencies may come under intense balance of payments pressures. While Russia especially deserves investors’ full attention, the familiar structural fragilities of EE will expose the broad region to possible discrete changes in the RUB, in our view. When the global economy bottoms, we would be keen to buy back KRW, BRL and MXN. Our view on the commodity currencies (AUD, NZD, CAD) is broadly similar to that on the EM currencies.
Call 3 — We remain bearish on the EUR in 1H. Though the EUR is no longer overvalued, it is still over-rated and over-owned, in our view. The sell-off from 1.60 to the high 1.20s merely puts EUR/USD closer to its fair value: EUR/USD was massively overvalued at 1.60. The EUR is no longer expensive, but it is not cheap. Further, the only reason why the dollar could have rallied so sharply since July was its hegemonic reserve currency status. The fragmentation of the European sovereign bond markets helps preserve the superior reserve status of the dollar. Finally, the negative feedback from possible fractures in EE could cause material damage to the EMU, and weigh on EUR.
Two main risks to our dollar view. The two key risks to the dollar are inflation and an unsustainable federal debt profile. The Fed’s QE operations need an exit strategy. The latest talk of the Fed issuing its own debt may be one way the Fed could unwind its balance sheet in time to stabilise inflation expectations. The dollar’s performance will be driven by inflation expectations, in our view. Similarly, the super-sized US fiscal deficits will be a risk for the dollar, though our central case view is that US Treasuries are more likely to be a preferred safe haven asset in a global recession relative to other sovereign debt..
more
Event: Group discussion for management trainee selection
Topic Global recession ..reasons and impact on India
Answers were interesting … i would like to share them with the web world
1. Osama ( she meant obama) does not want outsourcing to India
2. Obama wants to keep all jobs for black Americans
3. Banks in usa gave huge loans to India and china which they could not repay
4. Iraq war has driven usa bankrupt
5. Usa has printed lots of fake currency without gold standards causing inflation
6. American banks gave lot of loans to citizens without paperwork and they defaulted
7. America has no black money to support its white economy
8. China has caused usa bankruptcy to be a superpower
9. There were no rains in usa this year causing food shortage and inflation ( this one I liked the best)
10. People in usa take home loans but spend them else where on good food and clothes.
I can go on and on . Youth of today. They would browse the net for hours for all sorts of info. But young MBA’s had no clue . In the end i made an open offer . Anyone who answers “What is sub prime mortgage crisis?” gets a job right away.
126 answers …all wrong , weird and hilarious.
god help the world ..:)
1:10 AM 188 views 4 eprops 2 comments recommend
Comments (2)
Subprime crisis happens because everyone thinks that the rate of properties will increase over time. The economy is not very simple as it used to be many years ago when the future can be predicted very easily. Since the housing rates are following the borrowers are not able to pay back the debt that they have recieved and they faulter on the payment of loans.
12/5/2008 3:48 AM johnniesamuel (message) reply a period of reduced economic activity..Economic activity spread across the economy,
more
2009 Global Economic Outlook
December 19, 2008
By Richard Berner (New York) and Joachim Fels (London)
The financial crisis will continue to play out in 2009, with serious repercussions for the global growth and inflation prognosis. Downside risks prevail for both, so that deflation is a bigger risk than inflation. We expect just 0.9% global growth in the coming year, matching the weakest year on record (1982). But with policymakers resolved to do whatever it takes to end the crisis, recovery seems likely. The issue will be how long it will take to stabilize credit markets and thus economic activity. Our best guess is that the credit markets are beginning to improve, but the process will not be speedy. As a result, recovery will be slow in coming and moderate at best in 2010.
Risks to the Global Outlook: The Good, the Bad and the Ugly
A Deeper Slump Triggers Aggressive Policy Responses
Risks to the Global Outlook: The Good, the Bad and the Ugly
December 19, 2008
By Richard Berner (New York) and Joachim Fels (London)
Cutting Forecasts; Downside Risks Remain
We are sharply cutting our outlook for global growth and inflation in 2009 for the sixth time in seven months, this time to 0.9% and 2.6%, respectively, from 1.7% and 3.9% in November. And the 2010 recovery is likely to be moderate, despite unprecedented global policy stimulus. Our baseline view takes growth back up to 3.3% in 2010, with inflation at 3.7%. If that outlook is realized, global growth in 2009-10 would be the second weakest in the post-war period, barely stronger than in the deep 1982-83 downturn.
Global Forecast at a Glance
More importantly, downside risks persist as a global credit crunch and falling asset prices ripple through the economy. Indeed, incoming data around the globe indicate plunging economic activity and prices in October and November, pointing to a severe global recession and a real deflation scare. Courtesy of globalization, this recession has spread quickly, undermining any cushion of support from abroad for the US economy or vice-versa and intensifying the adverse feedback loops. Given the strength of economic headwinds, even ultra-aggressive policies seem unlikely to promote a vigorous rebound soon.
If the risks still point to the downside, why not simply cut our estimates to the point where those threats are balanced? There must be a better way to assess the balance of risks than by extrapolating the evolution of our forecasts from month to month.
A Framework for Assessing Risks to the Outlook
We think there is a better way: Assess and quantify the risks to the outlook systematically in advance. In this note, we provide a framework to meet that goal, thus providing investors and our colleagues with a sense of forward-looking plausible risk scenarios around a baseline (see The Method to Our Madness below for details on the methods, on specific risks, and on regional differences).
Globally, we believe that there are five key drivers of risk: First, the extent of deleveraging by leveraged lenders remains uncertain, and further write-downs and provisioning will intensify the credit crunch in several developed economies. The extent of further declines in asset values, especially in real estate, will deepen those risks, especially for US consumers (see “Perfect Consumer Storm to Last at Least Until Mid-2009”, Investment Perspectives, November 20, 2008). Second, many central banks have eased monetary policy aggressively and quantitatively, but it is unclear whether and when such policies will get traction. To be sure, there are recent signs of a revival in liquidity and money growth (see “More Action, Some Traction”, The Global Monetary Analyst, December 3, 2008). However, monetary policy in many EM economies remains restrictive.
Third, officials, notably the incoming Obama Administration, are considering a massive step up in fiscal stimulus, with an undetermined amount in infrastructure outlays and tax cuts. The timing, size, and economic effectiveness of such policy actions are likely to remain unclear for a while. Next, swings in currencies, commodity prices and risk premiums matter for the outlook in many EM economies (see Latin America: Shocking the Consensus, September 22, 2008). Finally, the extent of the real estate downturn in China is a critical risk factor for that pivotal economy (see Outlook for 2009: Getting Worse Before Getting Better, December 9, 2008).
The upside and downside results from those scenarios provide a very different perspective compared with the baseline. In our ‘ugly’ scenario, global activity contracts by 0.8% in 2009 and recovers by only 1.3% in 2010 as economic headwinds dominate policy stimulus. Given that we think of global recession as growth below 2.5%, the ugly scenario would border on something even worse than the most severe recession in the postwar period. In contrast, the ‘good’ scenario involves 2.3% growth next year and 4.4% in 2010, as a massive range of policy actions overwhelm the downturn.
Unfortunately, the good-ugly comparison reveals that the downside risks outweigh the upside odds. The margin is not large in 2009, where growth in the bear case falls short by 1.7 percentage points of the baseline, compared with a 1.4 percentage point gap between the good outcome and the baseline. But the downside margin of risk widens in 2010 to 2 to 1 (the ugly outcome is 2 percentage points below the baseline, while the good outcome is only 1 percentage point above the baseline).
Policy Paradox: Near-Term Downside Risks Promote Recovery in All Scenarios
Two factors skew the distribution of risks to the downside. First, while ‘tail’ risks (low-probability, high-impact events) lie outside the range of plausible outcomes, they shape the continuum of risks within that range. In our view, depression and deflation – defined as periods of two years (or more) of declining output and prices – are today bigger tail risks than the return of a global boom and inflation. Second, the credit crunch is powerful, and policies have been reactive rather than preemptive. As a result, deleveraging, risk aversion, and the near-term cyclical dynamics of recession are likely to offset policy stimulus for now.
Depression and deflation are important tail risks because, if left unchecked, the credit crunch could trigger severe consumer and business retrenchment. But they are highly unlikely for two reasons. For one, we see some economic excesses outside of real estate as more limited than in past periods, as a result of more limited global connectivity and supply-chain management. Most important, we believe that misguided policies deepened the Great Depression and Japan’s crisis, and we have learned three lessons from those events. First, aggressively use macro policies to buy time for other steps to take effect. Second, implement policies to stabilize the financial system and attack the root of the credit crunch. Finally, adopt measures to reduce the imbalances that triggered the downturn (see “Neither the Great Depression Nor Japan”, The Global Monetary Analyst, November 19, 2008).
Indeed, we believe under all our scenarios that aggressive policy will eventually gain the upper hand. That holds even in the ugly scenario for 2010. A premise of our risk analysis framework is that the policy responses and policy traction are critical determinants of the outlook in 2010: Put simply, the weaker 2009 proves to be, the more aggressive will be the policy response, including that from officials who have thus far been laggards.
Inflation Risks: Counterintuitive Skew
Finally, the risks to inflation are – somewhat counter-intuitively – tilted in the other direction from those to growth. Normally, massive economic slack would be associated with higher deflation risks. Make no mistake, our baseline and near-term scenarios encompass sharp declines in inflation outcomes globally. However, four factors make deflation unlikely: First, the current inflation decline largely represents a reversal of the inflation spike of early 2008, rather than the beginning of a new era. Second, we think that companies will quickly cut excess capacity to balance supply with demand. Third, some of the emerging global declines in goods prices are clearly declines in relative prices, not prices generally. This shift in the ‘terms of trade’ benefits consumers and most businesses, even in commodity-producing countries. The vital element to keep in mind is that the Fed and other central banks are easing aggressively and in some cases now quantitatively to influence inflation expectations.
Indeed, now there are three important factors that lead to upside asymmetry for inflation risks around the baseline. First, we believe that low oil prices will sow the seeds for higher prices down the road. Supply cutbacks should put a floor under prices at $30 or so, and when demand rebounds, supply will be slow to come back on line. Moreover, in developed economies, there is a risk, albeit a small one, that policy stimulus will overstay its welcome, eventually (beyond 2010 in our view) leading to renewed inflation concerns. Finally, in developing economies, poor growth outcomes in the short term are leading to further currency weakness, pushing up inflation at least over our two-year time horizon.
Regional Risks: Developing Economies Are Higher Beta
These risk drivers can differentiate economic (and earnings) risks across regions. While the US economy is at the center of the deleveraging dynamic, and thus likely will experience the deepest recession, the dispersion of risks for emerging market economies is wider than for the developed world. That’s appropriate because EM economies are more highly leveraged to global growth through trade, capital flows and commodity prices. In addition, many EM policymakers are still concerned about inflation risks following sizable currency declines. Delayed policy responses will increase downside risks to growth in both EM and developed economies like Europe and Japan.
As noted earlier, the risks for inflation in the developing economies are skewed to the upside around a near-term declining baseline. In contrast with GDP, where the risks are slightly tilted to the downside, for inflation the upside in the bull case is higher than the downside in the bear case. That reflects two factors: First, supply constraints in oil and other commodities limit the downside in the ugly scenario and push commodity prices even higher in the bull scenario. Second, in the bear scenario, falling exchange rates offset declines in EM inflation from other sources. In turn, such dynamics support our LatAm and Asia EM teams’ case that EM central banks have less latitude than the G7 to ease monetary policy. Over the long term, that issue will fade in importance as these countries develop further, become less dependent on commodities and external sources of growth, and their markets become more flexible. But for now, it perversely will boost inflation risks around the baseline.
The Method to Our Madness
A Framework for Assessing Risks to the Outlook
To assess risks, we analyze the impact on growth and inflation of a handful of critical, plausible alternative scenarios. Until now, our assessment of the width, skew, and fatness of the tails of the distribution around our baseline forecast has been subjective. Here, we adopt a more systematic approach by looking to key drivers in each region and to the most important common global factors that could cause change. Plausibility is defined to cover outcomes roughly one standard deviation from the mean in either direction. Our methodology involves shocking key drivers of risk for each economy or region and aggregating the resulting upside and downside scenarios into consistent global outcomes. For the US, those drivers involve different paths for home prices, different rates of loss among lenders, and more or less aggressive policy actions and their effectiveness. For Europe and Japan, policy actions are critical; for China, it is the performance of real estate. For Latin America, the shocks come through currencies (and the response through interest rates), commodity prices, and risk premiums.
Considering variation in commodity prices as a risk driver complicates risk analysis for two reasons. First, the weakness in demand that has promoted the recent collapse in commodity quotes is clearly bad news for emerging-market commodity producers. However, it is a welcome cushion for the perfect storm now battering the American consumer and by extension other consuming countries. As a result, these massive changes in the “terms of trade” are bane to some but boon to others, and their consequences for global risks must be netted from that interplay. Second, it is critical to assess the source of the change in commodity prices: Today’s plunge is primarily the result of weak demand, so it would be misleading to look at the drop as a new source of global stimulus. Conversely, if it results from increased supply, the effects on global growth likely will be positive. Indeed, we estimate that if an increase in supply allowed crude quotes to decline to $30/bbl, global growth would be roughly 0.5 percentage points stronger than in the ugly scenario (or -0.3% rather than -0.8%), and global inflation would decline by 0.3 percentage points (to 1.5% rather than 1.8%).
In what follows, we outline region-by-region risks and risk drivers:
United States – Our baseline outlook assumes that home prices (FHFA purchase-only home price index) decline by another 10% for a peak-to-trough total of 18%, and uses MS large-cap bank analyst Betsy Graseck’s estimate of $1.4 trillion in cumulative losses for the US financial system. We assume a $500 billion fiscal stimulus package spread over three years. The bear case assumes that home prices will decline by an additional 7%, that cumulative losses total $1.7 trillion, and that monetary and fiscal policy efforts take four months longer to be effective. Moreover, we assume that consumers save 10% more of the tax cut than otherwise. The bull case assumes home prices decline by only an additional 5%, cum losses amount to $1.3 trillion, the fiscal stimulus is $700 billion, and monetary and fiscal policies begin to get traction in the spring of 2009.
Euro Area – Our bear case (30% subjective probability) incorporates a domestic demand crunch caused by several factors. First, a noticeable reduction in the availability of credit to the non-financial private sector, rather than our baseline assumption of a gradual tightening in credit conditions and credit availability in line with a typical recession. Second, instead of easing slightly as in our baseline, the household saving rate could start to rise noticeably. Third, faced with a sharp deterioration in budget dynamics, governments might find it more expensive to fund themselves and private investment projects could be crowded out. Fourth, effective funding costs might go up considerably compared to our baseline of an ECB refi rate cut to 1.5% and a gradual easing in the Euribor/OIS spreads. In our bull scenario (10% probability), financial conditions become noticeably more favorable, fiscal policy achieves major multiplier effects, global growth surprises on the upside, and commodity prices on the downside. The sharp fall in many activity indicators in recent months would be seen as a sign of a proactive corporate sector that was fast to slash production, managed its supply-chain efficiently and made full use of the flexibility of temporary staffing.
United Kingdom – Our bear scenario assumes that the low household saving rate follows a trajectory similar to the recession of the early 1990s, rising sharply at a time when global growth is well below trend, so that reductions in domestic consumption are not offset by stronger growth in exports. A sharp and protracted fall in output would be inevitable. This risk is not our main forecast because we are not seeing the sharp rise in interest rates that helped drive the household saving rate up dramatically in the early 1990s. A more benign path than our base case is one where the "lost" output from 2008 and 2009 is not permanent because the supply side is not damaged by the credit crunch and activity bounces back strongly in 2010 to trend. It seems optimistic to assume that the severe damage to the financial system does no lasting damage to productive capacity.
Japan – The main downside risks to our base case are a political crisis and protracted policy gridlock after the snap elections, and a policy-induced slump of construction investment (again) just like the housing shock in 2007. Our bull scenario envisages a sharp improvement of terms of trade, which could reduce the outflow of real purchasing power and unleash pent-up consumer demand.
New Zealand – The key drivers for the bear scenario are (i) even weaker growth in trading partner economies, damaging export prospects further, and (ii) a sustained decline in house prices, which would prolong the recession.
China – Despite much attention paid to the G3 recession, we think the biggest swing factor for 2009 growth is real estate investment. Our base case (65% subjective probability) envisages a 6% decline in real estate investment by the private sector in 2009. If real estate investment were to contract by 30%, the impact would be so large that even the current fiscal stimulus package would not make up for the growth shortfall. We estimate that GDP growth would drop to 5%, tantamount to an outright hard landing. Under this bear case scenario (25% probability), consumption growth would likely be significantly lower as both employment and income growth would suffer. Our bull case (10% probability) envisages a larger contribution of net exports to growth because of less-deep-than-expected recessions in G3, as well as flat instead of reduced real estate investment. We estimate that GDP growth could reach 9.0% under this bull case, provided that the fiscal stimulus package would not be scaled back.
Korea – While many are focusing more on export and construction, we see consumption as the biggest downside risk due to household de-leveraging, wealth destruction and currency depreciation. Our bear case assumes domestic liquidity problems as foreigners continue to sell Korean bonds, squeezing wholesale funding further. The dollar shortage could re-emerge if a majority of ship orders are cancelled and shipbuilders cannot meet their external debt payment with trade credits. The upside risk depends on the effectiveness of China's stimulus measures as Korea's growth is heavily related to China's fixed asset investment.
Taiwan – The biggest downside risks stem from any delay in monetary and fiscal policy execution next year and further loss of competitiveness to Korea due to currency appreciation vis-à-vis the Korean won. The main upside risk depends on global demand for Taiwan’s technology exports.
Russia, Kazakhstan, Ukraine – For the former Soviet Union commodity prices remain the key external driver of risk scenarios. Russia and to a lesser extent Kazakhstan have temporary scope to cushion the downturn with fiscal expansion, but through much of the region monetary policy will have to be further tightened into the slowdown given the risks of deposit flight from fragile banking systems. IMF programs are likely to defend currency pegs in the Baltics, at the expense of a deep contraction, but to drive further depreciation in Ukraine. The sharp recovery in steel and oil prices seen in our central case scenario would bring rapid relief in the CIS in 2010.
Central Europe – Downside risks to growth and inflation dominate even after our recent downgrades. Open economies exposed to the auto sector (Hungary, Czech) are particularly at risk from a growth standpoint. Rates are being lowered everywhere, but the strength of the monetary transmission channel has weakened in the last few years due to increased loans in foreign currency, especially in Poland, Hungary and Romania. Fiscal policy does not have much scope to cushion the blow, and fiscal positions are set to deteriorate in 2009 on the back of lower growth. In Hungary in particular, the fiscal squeeze associated with the recently approved IMF package will provide an extra blow to consumers, in addition to slower credit and export growth.
Israel – The Bank of Israel’s pre-emptive policy easing and the government’s planned fiscal stimulus package should limit downside risks to some extent. However, an even sharper than expected decline in exports and easing domestic demand present downside risks. The absence of a housing bubble and sound fiscal policies are mitigating risks to a large extent, but upcoming elections might result in some policy slippage.
Turkey – The main risk rests with external financing, particularly the ability of the private sector to roll over debt. The expected decline in current account deficit and the funding from a possible IMF stand-by arrangement are likely to help close the potential financing gap. Protracted weakness in global markets may cause local depositors to switch back to foreign currency deposits, resulting in a noticeable depreciation in the currency. But the central bank has started to ease monetary policy and there will be limited support for small to medium sized enterprises that could prevent a recession.
South Africa – Risks are asymmetrically skewed towards the bear case of weak GDP growth and sticky inflation. Continued weak global growth prospects and a commensurate dearth in capital flows would keep the currency on the back foot, given the huge current account deficit. A recovery in global growth through 2010 would likely see oil prices rise sharply enough to prevent the SARB from cutting rates aggressively, thereby capping domestic growth prospects.
United Arab Emirates – The risks to near-term outlook are driven by: (i) the oil markets; (ii) the domestic real estate sector; and (iii) the availability of foreign financing. Although both fiscal and external accounts are expected to remain balanced at oil prices of about $40 per barrel, continued weakness in oil markets may lead to further output cuts, an adverse effect on oil sector growth, more moderate growth in public investments, and lower exports of services to neighboring oil-producing countries.
Latin America – Although we now expect Latin America to contract by 0.4% in 2009, we are concerned that the downside risks still dominate. The good news is that the starting point for Latin America has improved from the past: the region does not suffer from the same kind of current account imbalances or fiscal shortfalls as in the past. However, we are concerned that policy makers have less room to engage in counter-cyclical fiscal and monetary policy to temper the blow of the downturn. For the bear case, we assumed the nominal exchange rate depreciates by two times the 10-year standard deviation of the real effective exchange rate. We used a standard set of “bear case” commodity prices from our colleagues on the commodity research team as additional inputs. For the risk premium (spread over US Treasuries), we used the 10-year average. We then estimated implied interest rates and GDP growth (for more details see “Latin America: Shocking the Consensus”, This Week in Latin America, September 22, 2008). For the bull case, we have largely used the previous “base case” before our first revisions downward in October 2008 (see “Latin America: The End of Abundance”, This Week in Latin America, October 6, 2008).
December 19, 2008
By Stephen Jen & Spyros Andreopoulos London
In 2009, assuming that the global economy finds a trough by summer, we see the dollar rallying further into the trough, but underperforming most other currencies as the world recovers in 2H. The swings in the global business cycle will likely be the dominant driver for the dollar. Other factors such as US government debt sustainability and the US inflation outlook associated with the Fed’s QE (quantitative easing) operations will likely be secondary considerations, mainly because we believe that US Treasuries will remain well-supported and a flare-up in inflation is not a probable risk.
There is no official change to our forecast and we continue to look for EUR/USD to dip to 1.10 by 2Q, before recovering to 1.20 by end-2009. USD/JPY will likely exhibit a similar U-shaped trajectory, dropping to 85 by 2Q before rising to 100 by end-2009. Most EM currencies will likely experience intense depreciation pressures vis-à-vis the USD in 1H. Differentiation at the EM country level will likely be unproductive in the sell-off phase. But in the recovery phase, country-specific factors will likely drive a wedge between the currencies of the ‘good’ from the ‘bad’ economies.
Resurrecting our ‘four seasons’ framework. In thinking about how currencies might be affected by large swings in the global business cycle, it is important to consider both the real economy and the financial side (the buoyancy of global equity markets). In other words, exchange rates are not only functions of relative economic growth, but are also sensitive to general levels of risk appetite, which are correlated with the buoyancy of world equity markets. Since financial markets tend to be ‘forward-looking’ and anticipatory, when the world plunges into a recession, earnings forecasts are cut, risk-taking curtailed, and equity prices decline ahead of the actual contraction in economic activities.
To help us think about the implications for currencies, we first calculated the historical correlations between various currencies (vis-à-vis the dollar) relative to economic growth and the equity markets. Different currencies tend to perform best in different ‘seasons’, or ‘comfort zones.’ We suggest that high-beta currencies such as many of the AXJ currencies belong to summer or the spring quadrants, while the currencies of large capital-surplus countries, such as JPY and CHF, should be in ‘winter’ or ‘fall’. By and large, simple correlations of exchange rate performance relative to global growth and global financial market buoyancy are consistent with these broad prejudices. The distance of these currency cells from the origin denotes the size of the elasticities.
We believe that EUR and CHF should underperform the dollar as we enter the ‘winter’ quadrant, due to European and Swiss banks’ exposure to Eastern Europe. JPY, on the other hand, could be supported by acute repatriation flows as we head into ‘winter’.
Call 1 — The dollar to strengthen first, and weaken later. At the turn of each year, there is a temptation for analysts like ourselves to make one call on the dollar for the entire calendar year (i.e., a strong or weak dollar ‘year’). However, more often than not, currencies don’t change trends on January 1. 2008 is a good example: The dollar did not begin to show strength until May against AXJ currencies and until July against the EUR. In the first few months of 2008, the dollar was extraordinarily weak. For 2009, we see the opposite trends: dollar strength in the first months, followed by possible dollar weakness in 2H. We see the world toggling through ‘winter’ and ‘spring’ in 2009, with a risk that ‘winter’ may last longer than 1H, and ‘summer’ may come in 2010 or later. Thus, we will be buying dollars and JPY into 1H, but with a view to flip our positions some time in 2Q in anticipation of a global economic recovery.
Call 2 — EM currencies will be stressed in 1H. The global EM currency ‘moment’ is not over, in our view. In fact, the process is roughly halfway complete. We see weaker Latam currencies in 1H09. Pressures on AXJ currencies will likely persist, as these countries’ exports collapse and their central banks cut interest rates. We believe that even the CNY will be allowed to weaken against the dollar in coming months. Eastern European currencies may come under intense balance of payments pressures. While Russia especially deserves investors’ full attention, the familiar structural fragilities of EE will expose the broad region to possible discrete changes in the RUB, in our view. When the global economy bottoms, we would be keen to buy back KRW, BRL and MXN. Our view on the commodity currencies (AUD, NZD, CAD) is broadly similar to that on the EM currencies.
Call 3 — We remain bearish on the EUR in 1H. Though the EUR is no longer overvalued, it is still over-rated and over-owned, in our view. The sell-off from 1.60 to the high 1.20s merely puts EUR/USD closer to its fair value: EUR/USD was massively overvalued at 1.60. The EUR is no longer expensive, but it is not cheap. Further, the only reason why the dollar could have rallied so sharply since July was its hegemonic reserve currency status. The fragmentation of the European sovereign bond markets helps preserve the superior reserve status of the dollar. Finally, the negative feedback from possible fractures in EE could cause material damage to the EMU, and weigh on EUR.
Two main risks to our dollar view. The two key risks to the dollar are inflation and an unsustainable federal debt profile. The Fed’s QE operations need an exit strategy. The latest talk of the Fed issuing its own debt may be one way the Fed could unwind its balance sheet in time to stabilise inflation expectations. The dollar’s performance will be driven by inflation expectations, in our view. Similarly, the super-sized US fiscal deficits will be a risk for the dollar, though our central case view is that US Treasuries are more likely to be a preferred safe haven asset in a global recession relative to other sovereign debt..
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