Economic forecasts for 2010

As a member of Forbes Blogger Network I have been asked to provide my opinion about economic outlook for 2010. Here is the the question and answer.

Question:

September 15, 2009 marks the first anniversary of the fall of Lehman Brothers and the global financial meltdown.

What is your economic forecast for 2010? Are there specific economic markers that you find particularly useful and upon which you rely on in making your prediction?

Answer:

There are evident signs that global recession is easing. We can see green shoots broadly. Better than expected data from housing, labor market in US. Positive GDP reading in biggest European economies for Q2. But on the other hand still negative numbers in consumer spendings or latest industrial output in Europe and sharp GDP decline in Japan. In my view this will be also the picture for the rest of 2009 in developed economies.

This time source of global growth is outside developed world and particularly in Asia. Emerging countries like China or India avoided the recession and grow by 7,5% or 5,4% based on IMF forecast for 2009. Chinese stimulus plan shows positive impacts on rising bank lending, fixed assets investments a industrial output, commodity imports are also higher.

Unlike NIE (Newly Industrialized Economies) in Asia dependent on export (share more than 100% of GDP) and banking centers, China started recovery even with still weak export. Even though it is the biggest exporter in total amount, in % to GDP China is in low end of the ranking (33%).

Next example is India. Indian economy is even less dependent on export than China. Another key feature is that economy is highly service oriented. Consumption of services is typically less affected by volatility in income and wealth. This has proved to save Indian economy from sharp decline.


Picture above shows GDP grows for advanced economies and emerging markets. The common rule about more volatile emerging markets hasn't been fulfilled, meaning higher flying in economic boom and sharper declining in recession compared to advanced economies. This recession has showed potential and power of emerging countries like China or India.

Generally outlook for 2010 is following. Some countries are able to growth from domestic sources like India or China. The trend of recovery in Asia is going to be dependent in large on household behaviour in the United States and Europe. Generally foreign demand in advanced economies will set the shape of recovery.

Outlook for stock markets

Since March 2009 we could see one of the strongest rebound rally ever. There are increasing voices about correction and overbought markets. I suppose there will be correction this autumn. Even with good news coming to the street markets will be sent lower by profit taking after huge rally. The correction could be around 15% but definitely we will not test March lows.

Many analysts talk about high P/E valuation. S&P500 is somewhere around 16 compared to 100 years average which is 15. We are above but it is just because we subtract quarter with "low" earnings (nevertheless they were far better than expected). Have a look to latest recession when P/E ratio for S&P500 peaked 35. With improving earnings P/E will dramatically plunge. Current P/E valuation of 16 explain that markets are not valued "close to perfection" and there is still potential for long term consistent growth.