Chart Source: IMF
Highlights from the speech:
- Global growth should slow from 5% in 2007 to 3% in 2008, and accelerate to 4% in 2009.
- Falling oil prices and stabilization of the U.S. housing market are key to the outlook.
- Emerging economies have remained quite resilient to the U.S. slowdown and will play an important role in the re-emergence of global growth.
- Inflation risks are still in the pipeline; this will be a main driver of the oncoming slowdown in emerging economies.
- Only about half of the overall $1.1 trillion in losses has occurred to date (see recent post).
- Downturns that coincide with financial stresses are historically larger and deeper than those that are not – financial deleveraging still poses a major risk since it has been difficult for firms to raise capital.
Lipsky’s noted positives for a brighter global economy in 2009:
- Inflation pressures have receded in the advanced World.
- The U.S. takeover of Fannie Mae and Freddie Mac should support the mortgage market and “underpin the U.S. housing market, the banking system, and the broader economy.”
He is certainly putting a lot of stock in the U.S. Treasury’s decision to nationalize Fannie and Freddie. I only hope that Lipsky is correct; however, I have my doubts that the biggest intervention in history will alone stabilize the financial system. There is the only way that the U.S. Treasury’s actions will stabilize the financial system, and let me tell you, it is a big “if”:
U.S. Treasury intervention → mortgage rates fall below 6% and stay there (if they stay there, it is implied that bank lending standards would have loosened a bit) → potential homebuyers are enticed to buy → sales bottom → demand for housing grows and the excess supply of homes on the market goes away → prices rise → mortgage default rates start to fall → bank losses stop → the banking sector heals and so do many other parts of the U.S. economy → global growth resumes.
I am nervous, but confident that this long list of “things to do” will indeed get done.
Please leave comments. Rebecca Wilder