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UBS economists expect global recession
US: at least four quarters of declining economic output expected starting from the second half of the year, followed by sluggish recovery. A recession is inevitable even in Europe, especially in countries with marked imbalances; central banks likely to further lower key rates Marked growth slowdown spreads to Asia; Japan facing stagnation, China has room for manoeuvre in its monetary and fiscal policy.
The distinct escalation of the global financial and credit market crisis since September has caused UBS economists to again revise their already cautious economic forecasts downwards.
The US fought to stave off a recession by instating aggressive interest rate cuts and a substantial fiscal package at the beginning of this year. Nonetheless, recession can no longer be avoided after the sustained losses on the equity and real estate markets and the credit crunch that is becoming increasingly entrenched. UBS expects US economic output to contract for at least four quarters from the middle of this year. As budget imbalances in US households that have been living beyond their means for years have to be corrected by a sustained adjustment period, the recovery beginning in the middle of next year is likely to be very weak and the US economy will probably grow significantly slower in the foreseeable future than the 3% trend growth generally assumed hitherto. UBS economists anticipate more interest rate cuts by the US Fed as well as additional fiscal stimulus programmes in response.
Major slump spreads to Europe
The weakened global economic momentum and the smouldering financial market crisis have also greatly restrained European economies. The downturn in growth is likely to be particularly dramatic in those countries in which, similar to the US, the previously heavily overvalued real estate markets are now collapsing (Great Britain, Spain), or which are battling structural problems (Italy). Countries such as Germany and Switzerland should hold up somewhat better, since they have avoided excesses in the real estate market and in private consumption. However, even Switzerland, with its heavy dependence on exports and the significance of its financial sector, will probably not be able to avoid a period of economic stagnation. After 1.9% this year UBS now expects the Swiss economy to grow only 0.2% in 2009.
Overall, UBS economists expect Europe's economy to enter into a recession almost in synch with the US. In light of this, the central banks in Europe are also expected to further cut interest rates.
Asia also feels the pinch
Even in Asia, exports, and therefore economic growth - particularly in smaller, open economies - have decreased noticeably. According to UBS estimates, the Japanese economy is expected to stagnate at best in the coming year. Large countries such as China, India or Indonesia should fare better, as they have a smaller export ratio than the smaller Asian economies. Particularly China, which accounts for about 40% of Asia's economic output (excluding Japan), has room to manoeuvre in both its fiscal and monetary policy, making it possible to counteract a decline in economic growth of well below 8%.
Overall, UBS economists expect global economic growth to slow from about 5% in 2007 and 3.7% in the current year to 2.4% in 2009.
Table: UBS Wealth Management Research growth and inflation forecasts
Andreas Höfert, +1 646 467 40 67
UBS Wealth Management Research
Daniel Kalt, +41 44 234 25 60
UBS Wealth Management Research