2009 March 15 Sunday
2009 Economic Contraction To Be Bigger Than 2008

The show has just begun. Standard & Poor's expects most of the economic contraction will occur in 2009.

In our current view, we expect the U.S. recession will be deep and long and that it won't bottom out until the second half of 2009 as monetary and fiscal stimulus kicks in. Standard & Poor's expects that GDP will fall for four consecutive quarters, starting with the third quarter of 2008 through the second quarter of 2009. We now expect a peak-to-trough drop in real GDP of about 3.8%, but more will be in 2009 and less in 2008. Signs of recovery would likely show up in late 2009.

We expect GDP to fall 2.5% this year, much worse than the meager 1.1% increase in 2008. Growth will likely improve modestly in 2010, increasing just 2.0%. Housing will likely keep depressing the expansion through early 2010.

S&P do not expect housing prices to bottom until early 2010. This is not a good time to buy a house. Best to wait unless you are in an area where lots of auctions have driven down prices far below the peak.

S&P also see additional downside risk. Foreigners could stop buying US Treasuries and kick up US interest rates and inflation for example. The US has risk of getting stuck in a downturn for a much longer period of time like Japan in the 1990s.

All the property with values below the mortgages held on them will go further underwater this year. This increases the incentives for walking away from mortgages. The problems with walking away from mortgages have gotten smaller and better known. Expect more people to make that choice.

Europe, Japan, and South Korea will be hit even harder.

Europe did not escape the problems that swept the globe in 2008. The recession is hitting every country in the euro zone, where growth is likely to contract 2.7% in 2009, 3.4% less than last year's modest 0.7% performance.


We expect that Japan's recession will be its worst since World War II. After seven years of modest expansion, the Japanese economy will likely contract 4.0% in 2009 after already having fallen 0.7% in 2008. Two main engines of Japanese growth in recent years—corporate investments and net exports—have buckled under the credit crisis, the stronger yen, and a tumbling U.S. economy.

A 4% contraction in Japan. Ouch. They expect South Korea to contract 3.5%. South Korea still managed to grow 2.5% in 2008.

S&P expect China and India to grow 6.5% and 6% respectively.

Share |      By Randall Parker at 2009 March 15 03:55 PM  Economics Business Cycle

Ned said at March 16, 2009 4:47 AM:

This is an optimistic forecast.

Wolf-Dog said at March 16, 2009 11:52 AM:

Here is the interview of 60 minutes interview of Ben Bernanke.
He says that he is more optimistic for 2010.

Part 1 of 60 minutes interview of Bernanke:

Part 1 of 60 minutes interview of Bernanke:

Trent Telenko said at March 17, 2009 11:32 AM:

The California state budget expressly assumes an economic rebound in the last half of 2009. If the economic rebound is in 2010 in the best case, then CA tax revenues will not match outlays. We will see California default on its state bond issues.

Even if the Feds save those bond issues from technical default with a bail out. The act of doing so will call into question the actual valuation of all US sate and local government bond issues at a time the Feds are crowding out the bond market with Federal debt financing.

That will roil the US & world financial markets for at least another 6-12 months.

Sony lost $3 billion last year. So Japan is far worse off than the USA as far as recession/depression is concerned.

China will not be able to keep its export growth going in 2009 with the USA, Europe, South Korea and Japan in deep recession.

Thus, if the foreign economies are tubing worse than the USA in 2009, and our financial markets will be in the middle of another bond shock in the last half of the year. Just where will the USA be able to sell products to get out of the recession ourselves?

Randall Parker said at March 17, 2009 6:31 PM:


California is already facing at least a new $8 billion budget deficit. This will get even worse.

SACRAMENTO – Just three weeks after celebrating a hard-fought compromise that many hoped would end California's budget nightmare, state lawmakers received a fresh blast of chilling financial news yesterday.

Although the accord appeared to close a $42 billion deficit, revenue already has fallen well below projections, creating a new $8 billion budget gap, according to nonpartisan Legislative Analyst Mac Taylor.

Moreover, the state's “structural” budget problem – an embedded gap between income and expenses – could return with eye-popping shortfalls in just a few years, Taylor projected in his latest budget review and economic forecast.

The grim assessment presumes voters will pass six budget-related measures that would provide $22 billion to the state over the next four years. If one or more of the funding measures fail in a May 19 special election, the state's fiscal plight will be even worse.

Since the $22 billion hole is still there we really face a $30 billion and growing hole. For people who actually generate the wealth of the state the cost is going to be a couple thousand a year I bet. After all, we can't expect the low skills low income Third Worlders to contribute.

Trent Telenko said at March 18, 2009 5:42 AM:


To quote a friend of mine from there on California politics:

"A majority of California voters now think the state government can raise revenue from thin air, and that taxes can be raised indefinitely with no harm to themselves."

I'll also add that when the hurt does come, the people there in the voting public who caused it won't believe they are responsible for it. People who believe in "fairy tale politics" have to have their dying hands clawed from their grip on power before things can begin to change. That is the nature of a paradigm shift.

California is now a classic case of a body politic that as lost it's civic virtue. The only difference between California and Detroit is climate and time for more public and private infrastructure to decay.

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