- The credit crunch has caused the U.S. economy to enter its deepest recession in decades. Business conditions likely will remain challenging for the next few years as consumers retrench.
- Most major foreign economies are in deep recessions. However, rates of contraction may be starting to slow.
- The Federal Reserve is done cutting rates, but has implemented unorthodox programs which seem to have shored up the financial system.
- Central banks in major foreign countries have also responded by slashing rates dramatically. Inflation should recede in most countries, which will give central banks in developing countries scope to ease policy as well.
Other Financial Markets
- The stock market should stabilize as credit markets start to function again and risk aversion abates. Despite the recent rally in equity markets, sustained gains do not seem likely until the longevity of the global recession can be better assessed.
- The global downturn means that most commodity prices should not shoot up again, at least not in the foreseeable future.
- The U.S. dollar has rallied since last summer as other major economies have slipped into recession, and we project that the greenback will appreciate further in the near term. However, the very sluggish U.S. economic recovery does not seem conducive for sustained dollar appreciation. Therefore, the greenback could reverse direction later this year or early next year.