We won't comment on the supreme imbecility of being able to predict something as amorphous as a recession in decile increments, but for what it's worth, here it is. Just out from the crack Goldman tag team of Hatzius and Dominic Wilson, who usually don't work together unless they have to make some big statement: "We now see the risk of a renewed US recession as around 40%." (this was 30% before - expect every other Wall Street idiot to follow suit with an identical prediction). Also, those wondering if Goldman is content with getting shut out on its IOER cut demand, we have the answer: no. To wit: "We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify." Lastly, as relates to the saving grace in Europe, little surprise there - Goldman, whose plant Mario Draghi is about to take over the ECB, expects the very same ECB to open the spigots: "The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December." As for European economic prospects, well, sacrifices will be made: "we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery." And with a former Goldmanite about to take over the European money issuance authority, we have a bad feeling about what will transpire in Europe after October 31, when Trichet finally exits stage left.
Full note:
World Growth Slows as Europe Stagnates
The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly, from 4.3% to 3.5% in 2012. Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery. The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December.
The increase in spillovers from the Euro area, primarily via tighter financial condition, is the primary reason why we have also downgraded our forecasts for the US further. We now see the risk of a renewed US recession as around 40%. We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify.
Despite the deterioration in the advanced economies, Table 1 shows that our baseline global growth forecast for 2012 remains at 3.5%—a downgrade of 0.8ppt from our prior forecast and well below the pace seen in 2010-2011, but still decent by historical standards. The main reason is that we expect only a modest slowdown in China and other emerging economies. Although the recent Chinese policy tightening and the downturn in export demand are likely to weigh on growth in the next few quarters, we expect the waning inflationary pressures to lead to a renewed easing of policy later this year, and this should underpin a moderate reacceleration in 2012.
The downgrade to our growth forecasts has led us to lower our targets for bond yields, commodity prices and equity prices. While even the new targets are generally above the forwards, the downside ‘skew’ to our market views has increased notably. (more)
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