Projected Growth and Inflation in Rapid Decline

December 8, 2008

The latest Issue of The Economist includes the results of its latest monthly survey of macroeconomic forecasts, showing additional substantial downgrades for projected growth and inflation in 2009. Rarely has a consensus changed so rapidly within a mere three months. The first table below documents the evolution of projected growth since September, and the second does the same for CPI inflation. Two aspects of these tables are especially striking. The first is the 1.1 percentage point downward revision just made in projected U.S. CPI inflation next year to just 0.7%, which is only 0.4 percentage points higher than the latest estimate for Japan and clearly at a level where the risk of deflation will be taken very seriously by the Federal Reserve. Given the increasing focus of monetary authorities upon price expectations — both their level and how such are moving — this development strongly suggests that the Fed may be endorsing a fuller quantitative easing next year as Japan accepted in 2001. The danger of such a policy, as the Bank of Japan discovered, is the difficulty of implementing an exit strategy. The BOJ will probably be heading back in that direction itself. A second observation highlighted in these tables is the uniformity of how forecasts are getting revised in the United States, Euroland, Japan, and Britain. Projections have shifted pretty much in tandem and in a way that preserved relative rankings for the most part. It’s hard for currency markets to trade on cyclical news when perceptions of the performances of the major economies are adjusting in unison. Instead, currency trading has looked to risk aversion indicators such as but not limited to stock prices for a cue.


2009 GDP-f September October November December
U.S. +1.3% +0.6% -0.2% -1.0%
Euro area +0.9% +0.6% -0.1% -0.9%
Japan +0.9% +0.6% -0.1% -0.9%
Britain +0.6% +0.1% -1.0% -1.4%
Canada +2.0% +1.4% +0.5% +0.1%
Australia +2.6% +2.3% +1.9% +1.1%


2009 CPI-f September October November December
U.S. +2.6% +2.6% +1.8% +0.7%
Euro area +2.5% +2.3% +2.0% +1.5%
Japan +1.0% +1.2% +0.7% +0.3%
Britain +2.9% +2.9% +2.4% +1.7%
Canada +2.2% +2.5% +2.2% +1.8%
Australia +3.3% +3.2% +3.2% +2.8%



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