Economists at High Frequency Economics (HFE) forecast a dire outlook for Japan and Euroland but a better economic outlook for the U.S. On a Sept. 10 conference call, Chief Economist Dr. Carl B. Weinberg stated in very strong terms that the economic outlook for different regions will vary greatly according to how strong or weak each country or region's economic stimulus has been. It is a "policy driven" difference, Weinberg said. In particular he pointed to Japan and Euroland as places that will now enter a depression, as even though the recession may be abating, the economic contraction has been so severe and so fast that those economies will suffer a "prolonged" period of "three years to a decade," of "depressed economic activity."
Dr. Ian Shepherdson, Chief U.S. Economist at HFE, had a rosier outlook for the U.S. He says that although he has been "miserable for the best part of the last four years," he is now "significantly more cheerful" about the prospects for recovery in the U.S. He credits the "massive" regulatory response of the U.S. government for staving off for this country the depression his colleague projects for Japan and Europe as a result of their much more meager stimulus and regulatory response to the crisis.
While there is a view that the massive U.S. stimulus program could generate a wild inflationary spike, Shepherdson is not worried about inflation. Calling himself an "inflation optimist," he noted that he "wouldn't rule out...a bout of modest deflation," but added that he doesn't expect nominal wages to fall. He says that we are in the U.S., "a million miles away from inflation lurking around the corner."
Shepherdson went on to say that a "post Lehman catastrophe has been diverted by policy." Deleveraging is underway in the U.S., "assisted by policy." This deleveraging is good over the long term, although the consumer is constrained from spending because they "don't have access to credit and labor income, so consumer spending is not growing." Comparing the U.S. economy going forward to one that is starting to recover "after a war," it's Shepherd's view that the consumer will be "leaner, smaller," and because consumption is such a large part of the U.S. economy, it will grow in a "somewhat constrained way."
His longer-term forecast is for stronger growth for 2012 to 2015, with "low inflation and gradual tightening," by the Fed. He's not worried about the Fed tightening very much shorter term, though: "Even modest tightening by the end of next year is unlikely"
Euroland and Japan: Prognosis negative
Weinberg, on the other hand, projects an actual depression for the next several years in Euroland and Japan. In these regions, the economy may have stopped contracting, bit it fell so far and so fast that he foresees "no output for a very long time."
Weinberg says that Japan, "could be a decade away from returning to the [industrial] output levels it enjoyed at the beginning of 2008." That's in part because while the "GDP in Japan is down 8.3% from peak to trough...output is down 26% in the industrial sector." But Japan's employment is only down about 6%. That means that to be "consistent with the production decline," which puts Japan back to 1987 levels, labor levels have a long way to drop--he says another 2% or 3%. Put another way, in Japan, "unemployment will continue to rise to adjust to the depressed level of the GDP."
Weinberg is also unhappy about the change in government in Japan, and the country's demographics, which are now dominated by retiring baby boomers who are taking money out of retirement accounts where much was invested in Japanese Government Bonds. Without that pool of buyers, yields will rise on those securities, raising the cost of borrowing for the country.
So what does this mean for investors? Weinberg asks: "What happens if the U.S. recovers and Euroland and Japan do not?" In that scenario, he says, the U.S. trade balance could "move to a deficit," and he projects international interest rates to be "flat to near zero." Based on the stimulus packages here in the U.S., "the economy should get stronger, that's dollar positive--so the dollar should not fall apart."
Comments? Please send them to email@example.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.