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Posts Tagged ‘Europe’

The latest surveys in the United States show that around 70% of people are upbeat about the economy and Obama’s ability to solve the country’s pressing problems.

What is baffling however is why they are optimistic, and I would not want to be in Obama’s shoes given such high expectations.

Optimism is good but it should have a dose of reality mixed in with it if it’s to be helpful and all the present signs are that the economy will get a helluva lot worse before it starts to get better and we’re looking at a two year period at least before anyone is likely to feel any improvements.

What we are most likely looking at is a future rise in unemployment to around nine percent and a cumulative gross domestic product drop of more than four percent making it the most severe recession since WWII and it will most likely be longer and deeper than the ones that occurred between 1974-1975 and 1980-1982.

What’s more, even if the economy were to technically exit a recession by the end of 2009, the recovery could be so weak because of the damage to the credit mechanism and overall financial system that the benefits would not be felt until a long time afterwards.

Obama will also inherit an out of control fiscal deficit that may reach as much as a trillion dollars in 2009 – 2010 and a situation in which deleveraging is still taking place and causing a worsening of the credit crunch. In addition to this nightmare scenario millions of properties are in negative equity territory and people are on the verge of losing their homes. To make things worse, the Fed will soon be at the point where it can no longer reduce the Fed funds rate and as the slack in goods, labor and commodity markets becomes deeper there will be a serious risk of deflation.

Not just the United states but the world economy will experience a severe recession and a contraction can be expected in Europe, the U.K. Canada, Japan, Australia and New Zealand and China is probably looking at growth rate of around 6% in 2009.

So, why are people feeling so optimistic?