The current financial market disruptions will most likely be followed by global economic stagnation in 2009 and 2010, says Moody’s Investors Service in a new report.
Even as the financial crisis in its most severe form subsides, Moody’s expects to see less capital being risked across the globe and lower growth.
In a report that updates markets on its baseline view of global economic and financial prospects, Moody’s says its central scenario ? ?Global Healing? ? calls for a very sharp downturn in the advanced economies, with some contraction in 2009 followed by below-potential growth in 2010. Moody’s expects the emerging market economies to post growth short of their potential during the two-year period. This scenario of painful economic convalescence describes a U-shaped recovery for advanced economies, but output losses are unlikely to be recovered rapidly and elevated risk aversion will persist in credit markets for a prolonged period.
A more positive scenario (?Global Resiliency?) is one where the process of international economic and financial integration is just temporarily slowed. The scenario posits the US economy enduring only a very mild and short-lived contraction because of massive fiscal and monetary policy stimulation, with the rest of world experiencing a sharp deceleration in the last quarter of 2008 and first quarter of 2009, when growth would resume. This scenario of V-shaped economic recovery sees also a resumption of capital flows and liquidity below but not far away from pre-crisis levels.
