In this podcast Nariman Behravesh, chief economist at Global Insight Inc. is throwing out some surprising research. The most interesting bullet points are:
- Q2′08 GDP in US is +2.5% (who would imagine!)
- Q4′08 is negative
- Q2′08 GDP in Eurozone is already going negative, by their estimates (wow!)
- US headline inflation will reach +6.5% sometimes during this year
- US headline inflation will be as low as below 1% sometimes in 2009
- Next major bank collapse will bring interest rates to 1.5%
Well, it’s hard to shock me with the predictions of sharp disinflation in ‘09, I’m in that boat, too. What’s interesting is that, apparently, Europe is falling into recession before we do. Yes, I was saying that we have been in recession since December, but nobody expected that the Spanish Inquisition will come with a stimulus package. Our economy resembles a homunculus that is temporarily animated by more debt injections, as if we don’t have enough of that stuff already. But positive GDP is positive GDP, so the worst is delayed for now.
My theory iss that the true, deep recession in the US is impossible before we see a significant slowdown in China. See the article titled “The anatomy of Consumption“. And the slowdown in China is impossible until Europe and Japan go into recession, because those are the huge export markets of Chinese goods. The recession in Europe must eventually trigger weakness in the Euro and/or reductions in imported goods. Europe is over 500 million people, so it will be the last shoe to drop.
Once China is hit hard the price of oil will drop like a stone, and this is why. US and China are the two major consumers of oil (I don’t have a handy link), but we are different. The demand in US is not very elastic. Those who need to drive will have to drive and the homes must be heated. We already reduced gasoline consumption by about 5% and it’s hard to squeeze out another 5%. China is different, the oil demand there is extremely elastic. People drive mostly because they can, not because they have to. All the manufacturing and transport is export-oriented. Once exports drop, thousands of factories will close, a hundred million of people will lose jobs, and a good chunk of power plants will be stopped as well. Oil consumption may drop sharply and that will be felt.
The experiment with interest rates is quite interesting - the US Fed dropped rates sharply but the European CB did not. And now it seems that Europe is entering the recession with $130-$140 oil, while we will enter the recession later, when oil will be cheaper. So to some extent Europe is the one to bite the bullet first, doing the hard job of slowing the global demand for imported goods. We already heard about fuel riots in several places in Europe. Did you hear about any fuel riots here, in the US? We’ll have our oil shock now and recession later. I think it’s much easier this way.
9 Comments
Hi, do you know how large the mp3-file is?
Interesting how things are unfolding. I suppose this means that the dollar strengthens from here on in?
MP3 file is 8.5 MB, but who cares - download it…
This is very interestin, especialy for the rates. 1.5% will kill USD. EUR/USD will go to new norm - 1.60 at least. Oil probably will go to 140 as new norm, and gold will be 1050 as new norm. We will see.
Considering the CPI/PPI number is highly massaged in USA by at least 3-4 percent, america is already in recession first. Please substract at least 3-4% off GDP number then you get the real picture.
Everyone who wants to imply that CPI massaging is putting falsely low numbers now is wrong. The worst massaging was the removal of house prices in CPI and replacing it with owner imputed rent. This single replacement produced falsely low CPI for many years during the housing boom. But now, since house prices are deflating, the owner imputed rent is falsely making the CPI numbers HIGH.
Yes, CPI is falsely high right now. Deflation is already apparent, and will only become more so.
Anonymous, I guess you’ve proved that the absolutely correct definition of inflation is absolutely impossible.
>>> I suppose this means that the dollar strengthens from here on in?
It could, but not necessary. It’s unclear for how deep the European recession could be. And how many bad loans they have, comparing to us.
The biggest paradox could be that we can find out later on that Rimnimbi is actually overvalued, not undervalued. That will make many analysts look very stupid
Q2′08 GDP in US is +2.5% (who would imagine!)
Stimulus package? I mean, the US could increase its GDP by selling debt followed by government spending, couldn’t it?
Gross domestic product
Anon: very interesting comment regarding CPI.
Had the same idea over the years as I watched housing skyrocket and wondered why inflation numbers were not recording these cost. It makes sense that its now a double edge sword
and creates a upside down financial market.
Interesting global relationship that you propose here. It appears that the world is falling back into the pattern that led to the over productive capacity (before communism) that caused the last Great Depression.
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