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Bracing for the headwinds of financial stress

- "Last week we reported a significant deterioration of financial conditions in recent quarters based on an update of the USMPF FCI. This week we consider the implications for growth ahead, based on both a statistical analysis of the relationship between financial conditions and growth and a review of parallels and differences with developments during 2007 when financial conditions first began to deteriorate in this cycle."
- "While the statistical relationship between the FCI and subsequent GDP growth is not especially robust, it does show evidence of strengthening during times of financial stress. Based on our analysis, we conclude that to this point, the deterioration has probably knocked several tenths off GDP growth over the quarters ahead."
- "The damage will be limited if, as we expect, event risk in Europe recedes in the months ahead and financial conditions recover from much of their recent drop. But a further and more extended deterioration in financial conditions would pose significant downside risks to the outlook."
- "Even so, we see a double-dip recession as relatively unlikely at this juncture. Discretionary spending in the US has already been pushed to six-decade lows relative to GDP, and significant progress has already been made in mending private sector balance sheets."
DeutscheBank Global Economic Perspectives 20100630

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