Recession: how long and how deep?

What started as a real estate bubble bursting, with an associated financial industry crisis, as now morphed into an economy-wide (and even a worldwide) recession. Since the official beginning was pegged as December 2007, this recession will probably be one of the longest and deepest since World War II. IHS Global Insight Inc. forecasts continued declines in real GDP until the third quarter of 2009.

Top 10 Economic Predictions for 2009 (Courtesy of IHS Global Insight Inc.)

1. The U.S. recession will be one of the deepest--if not THE deepest--in the postwar period.

2. The rest of the developed world also will suffer: The downturn will be the worst in Europe over a couple of decades and the worst in Japan since 1998.

3. Growth in emerging markets will decelerate dramatically. There are three transmission mechanisms to the emerging world: a) the collapse in commodity prices (Russia, Iran, Venezuela); b) drying-up of capital flows (Eastern Europe); c) decline in world trade (Asia).

4. The Federal Reserve and other central banks will keep cutting rates.

5. More fiscal stimulus in the pipeline. It will include tax cuts, infrastructure spending, and other provisions.

6. Commodity prices will remain at depressed levels for much of the next year.

7. Inflationary fears will be replaced by concerns about deflation.

8. Global imbalances will improve markedly. U.S. current account deficit will drop by 50 percent. The drop in commodity prices will improve the terms of trade between commodity importing and commodity exporting countries.

9. The dollar will remain relatively strong as long as the financial crisis continues.

10. The single biggest risk facing the U.S. and world economies is a timid response to the crisis. The good news is that the United States and China are taking the crisis very seriously. The bad news is that Japan and the Eurozone are much more timid.

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