Sluggish recovery most likely 2010 global macroeconomic scenario

Moody's Investors Service continues to believe that a sluggish recovery is the most likely global macro-economic scenario for 2010. In its 2010 update of its report series entitled "Moody's Global Macroeconomic Risk Scenarios", Moody's said that it does not expect the global economy to rebound strongly in 2010, but rather to return to trend growth rates, with persistent unemployment and budget deficits.
This is in line with the "hook"-shaped recovery scenario which Moody's introduced in May 2009 and which assumed that the crisis will leave enduring scars and that many economies will not return to their previous output paths.
According to Moody's new report, the sluggish recovery will be characterised by a lack of homogeneity in the economic rebound across different regions. "In most advanced economies, the recovery will be fragile because of numerous headwinds — especially those related to the expected challenges in sovereign risk in 2010," said Pierre Cailleteau, Managing Director of Moody's Global Sovereign Risk Group.
Another factor is that the combination of lower levels of activity — given the significant output losses — and diminished trend growth in many regions will have an important impact on credit. "The world has more or less tacitly opted for financial stability at the expense of economic vitality — and this will make the absorption of large public debts more challenging," explained Cailleteau.
Moody's report also identifies at least three downside risks — albeit of varying probability — to its hook-shaped global rebound scenario. The first is that of governments and central banks exiting high-stimulus policies in a disorderly fashion, leading to an abrupt increase in long-term interest rates and/or sharp currency realignments. The second is that financial institutions are unable to rebuild capital buffers at a sufficient speed to withstand the remaining economic and financial threats. The third and least probable downside risk is that of an unexpected decline in China's growth dynamic.