State street's us outlook is predicting further recession with no sign of recovery until 2003 rather than the more common forecast of 2002
The US economy is in for a protracted recession, despite the self-serving forecasts of economists and investment banks, said Avinash Persaud, State Street's head of global research in a Cantos.com interview.
Q. The US is in the midst of a sharp contraction, which we have not seen since 1991, but there are tentative signs of a rebound. When do you think we will see signs of a recovery in the US?
A. I think the markets are already sanguine about the US economy. It is important to remember that economic forecasts and economic perceptions are shaped by the investment bankers. They dominate the airwaves and the 'V'-shaped recovery is the most convenient forecast you could have if you want to sell equities. People are talking about the traditional relationship that equities rally six months before the recovery. I think the sad lessons of history are that policy makers are very good at murdering a boom but they are not very good at reviving an ailing patient. And the other thing I would say is that this confluence of circumstances is more akin to the 1890s than the 1990s ' excessive investment, not enough savings. If you look at those downturns and recessions, they have lasted a long time, they don't come or go in six or nine months, it's more like 18 or 24 months. I reckon that we will have something like a lazy 'W' or a 'U' shaped pattern with a recovery really in 2003 rather than 2002.
Q. But should we not be seeing more signs of recovery ' inventories can't go much lower, can they?
A. Inventories are very low and of course companies want to build back their inventories. No longer are we thinking in terms of just-in-time, now it is just in case. But I think that on the investment side there are still signs of over-capacity and too much technology investment. It will take a while before those inventories are seen to be too low.
Q. But what about the Fed's actions, the cutting of interest rates. Is that not going to stimulate the economy?
A. The Fed has been very aggressive, clearly, and one wonders what happens when they run out of rope and they reach zero. But what we need to happen here is that investment spending has to fall sharply as it is doing and savings have to go up and these two things take time and are not particularly accelerated by sharp rate cuts.
Q. That would suggest then that there is a need for action on behalf of the policy makers. Do you think the US Senate should be doing more?
A. There are some worrying signs of gridlock with a big debate in Congress, which has held back much anticipated fiscal impulse. The fiscal authorities should be doing something. I believe they will end up doing something, but in a fair amount of time. And the danger is that it is so politically driven it probably may not be the right thing.
Q. Now what about the dollar in all this? It has been fairly resilient over 2001. Where do you see it going in 2002?
A. The dollar became this magical animal which would rally on both good news and bad news. A recent study of ours suggests it is because the dollar became the world's primary safe haven in late 1999 and so when things turned down people ran to their safe haven which was the dollar. There is some evidence that this safe haven status is slowly beginning to be eroded. The inflation picture is no longer so clear. Once inflation is low, the high productivity that drove it low is no longer so clear. The fiscal position is deteriorating too. Inflation is looking good elsewhere, for example, in the eurozone. So the US's strong fundamentals are not that strong, relatively. I think as those fundamentals begin to deteriorate and the dollar loses its safe haven status, it puts the dollar under the spotlight again. It will be much more vulnerable to bad news and the real crunch time will come, I expect, in spring of 2002, when the Fed cuts rates maybe below 1% and there is still no recovery.
Q. But you could not say the euro could aspire to safe haven status ' there are no other pretenders, are there?
A. That is right. We are heading for a fairly unique situation where there is not one primary safe haven in the world and that is one of the reasons why currencies today are so calm. Now there is uncertainty and tremendous volatility in the equity markets and the bond markets. It is not because there is serenity out there. It is because no-one knows really where to go. They do not like the dollar, but they do not like the euro or the yen.
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Short-term noise or something sinister?