Good News Beyond the First Quarter?

(Export Development Canada – Peter G. Hall)

Decoupling was a popular term a year ago, used to describe how the rest of the world had unhitched from the U.S. economic problem. It is now rich fodder for late-show humour. The acutely synchronized recoil that output saw in late 2008 has erased decoupling from the vernacular, and sent global forecasts tumbling. To make matters worse, this is no one-quarter wonder.

Even more dramatic was the size of the hit to output. The mighty U.S. economy fell by an annualized 6.3%. Pan-European output fell by 6.6%. The loss in Japan was a staggering 12.7%. For single-quarter performance, these numbers have few precedents in recent history.

First quarter, 2009 expectations are almost as gloomy. A further 5.7% contraction is forecast for the US. Japanese forecasters think their economy took an additional 11.7% pasting. Europe gets off a bit more easily, with a ‘mere’ 3.2% drop. Few if any of the remaining industrialized economies will escape unscathed, and Canada is in an unfortunate subset of economies where the decline will actually deepen. Moreover, emerging markets are showing signs of continued duress. Back-to-back declines of this magnitude are extremely rare in the past 50 years, occurring just once in Canada, the UK and the U.S., but unheard of in France, Japan and others.

From this point, the path of GDP growth is less certain. Recent monthly indicators are very modestly upbeat, leading to talk of bottoming-out. Equity markets have rallied, further boosting sentiment. Some analysts maintain that the sharpness of fourth- and first-quarter contractions will itself provoke a positive, albeit tepid, response. Others look at the downward recent momentum and believe it will be sustained in the coming months. Which argument is most compelling? Read more here.