The US is in the midst of its worst recession since the Great Depression of the 1930s. However,the magnitude of the fiscal and monetary stimulus seen over the past year will help ensure thatthe most likely scenario for the US economy is a ‘Great Recession’, and not a full-blown depression.That said, the economic recovery is going to be weak and prolonged, as US householdsdeleverage their balance sheets and business investment retrenches in accordance with reducedaggregate demand. We are forecasting a 3.3% real GDP contraction in 2009, followed by growthof just 1.2% in 2010.
The parlous state of the economy means that President Barack Obama has his work cut out forhim in the first year of his administration. While the Democratic Party’s grip on both houses ofCongress will give him leeway to enact new policies, there are already signs of dissent within theranks, and it will be impossible for him to please both sides of the aisle. The Republican Partywill face a steep uphill climb as the 2010 legislative midterm elections approach, but continuedeconomic strife would put the party in better shape for a comeback in 2012.
The biggest risk to our core outlook is the potential for a ‘double-dip’ recession, in which a recoveryin economic activity in H209 proves short-lived and the economy takes a second leg down in2010-11. The risks of this scenario unfolding have risen over the past few months, in our view.For now, we are content with our 2010 real GDP growth forecast of 1.2%, which reflects our coreview of an ‘L-shaped’ recession - one in which the contraction in output is sharp, but the recoveryis tepid. It will take until at least H211 before real GDP growth returns to trend.
The biggest threat to the country’s business environment standing in the short-term is the potentialraft of new regulations and quasi-nationalisations arising from the financial sector meltdown.Government involvement in key sectors, such as autos, is also a concern. Looking beyond thecurrent downturn, however, the US business environment continues to possess a myriad of basicstrengths, including a competitive labour force and a legal system that protects investor rights andis conducive to conducting business. The Obama administration’s ambition to rebuild the US’screaky physical infrastructure is also welcome, but it could be many years before the impact ofany plans will be felt.
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