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Caterpillar’s 2009-2010 World Economic Outlook

[Compare to #msg-37237593 to see how CAT’s forecasts have changed in the past six months.]

http://finance.yahoo.com/news/Caterpillar-Reports-prnews-3373177486.html?x=0&.v=1


2009 Economic Outlook

Industrial production has improved in the vast majority of major economies, signaling an end to the world's worst postwar recession.

• Central banks accelerated interest-rate reductions after the Lehman Brothers' bankruptcy, and interest rates throughout the world are the lowest on record. For many developed economies, interest rates are lower than during the Great Depression.

• Central banks increased their balance sheets to increase liquidity in financial systems. Although banks are still holding much of this liquidity, some has moved into the public's hands. Growth in the money supply accelerated in some of the larger economies.

• Governments introduced more than $3.5 trillion in multi-year stimulus programs with most of the expected impact in the last half of 2009 and into 2010.

• World economic growth should be positive in the last half of this year. However, the collapse in growth late last year and early this year means world output will be down slightly more than 2 percent for the full year, the worst decline in the postwar period.

• Asia/Pacific will be the strongest region for growth this year, an estimated 4 percent. China's recovery stimulus returned its growth to almost 8 percent in the second quarter, and full-year growth should be nearly 8.5 percent. India and Indonesia also reacted quickly, and 2009 growth should average about 6 percent and 4 percent, respectively.

• Africa/Middle East should have marginal economic growth. Positives include improved access to credit, higher commodity prices and lower interest rates. The CIS economy, despite some signs of improvement, should shrink about 6 percent in 2009.

• Most Latin American economies are in recovery, led by a strong rebound in Brazil. However, a recession in Mexico will result in the regional economy declining an estimated 2 percent this year.

• Collectively, developing economies should grow almost 1.5 percent this year. Although growth is down from 5.5 percent in 2008, it is much better than the 3.5-percent decline expected in developed economies.

• The U.S. economy declined at less than a 1-percent rate in the second quarter despite record inventory reductions. A slowing in inventory reductions, some improvement in consumer spending, further gains from trade and more government spending likely pushed growth to 3 percent or better in the third quarter. Despite further growth in the fourth quarter, output will decline about 2.5 percent for the full year.

• The European economy declined about 1 percent in the second quarter, and surveys suggest recovery started in the third quarter. However, earlier severe declines should leave output down 4 percent for the full year.

• The Japanese economy collapsed during the recession, with industrial production bottoming 37 percent below the best month in 2008. Recovery has started, but the Japanese economy will be down about 5 percent for the full year.


2010 Economic Outlook

Led by developing economies, we expect that economic recovery will strengthen in 2010, with worldwide growth of about 3 percent. This rate of growth would be the best since 2007, but low by historic standards given the depth of the recession.

• Consumer prices are currently declining in the United States, euro-zone and Japan; inflation in the developed economies is the lowest since 1969. At the same time, unemployment is high and generally rising. As a result, we assume most central banks will maintain very low interest rates through at least mid 2010 and then raise rates cautiously in the second half.

• We project the Federal Reserve will increase rates from about 0.15 percent to 1 percent by the end of 2010; the European Central Bank, from 1 percent to 2 percent.

• Many credit spreads are elevated, and businesses often struggle to obtain credit. We assume central banks will need to maintain expansive balance sheets throughout much of 2010 to further ease financial pressures.

• Stimulus programs should have maximum impacts in the first half of 2010. Some governments may expand programs to provide additional support.

• The severe recession left the world economy with vast amounts of unused capacity. As a result, inflation is unlikely to develop into a serious problem in 2010, no matter how fast the recovery. [However, this ignores US “stealth inflation” attributable to a weakening dollar.]

• Economies are still struggling with continuing problems, which is normal in the early months of recovery. However, historical comparisons show that severe recessions give way to rapid recoveries.

• Our forecast assumes that developing economies will continue to outperform developed economies. Growth in the developing economies should be more than 5 percent in 2010, compared with about 2 percent in the developed economies.

• Improved world economic growth in 2010 should extend the ongoing recovery in commodity prices. We expect most commodity prices will be attractive for investment [natural gas may be a notable exception], and producers will increase both production and investment.

• Asia/Pacific will remain the fastest growing region, with about 6.5-percent growth. We expect almost 9-percent growth in China and 7-percent growth in India. High rates of growth should improve construction spending and investments in mining capacity.

• The economies of Latin America, Africa/Middle East and CIS should grow between 3 and 3.5 percent next year. Better growth should revive construction spending, and most economies will benefit from higher commodity prices.

• We forecast 3-percent growth in the U.S. economy, which is slower than past recoveries from severe recessions. Housing, highway construction and mining production should all improve. Nonresidential building construction will likely continue to decline. We project housing starts of about 1 million units in 2010, up from around 600,000 units in 2009. Inventories of unsold new homes have dropped sharply, prices have stabilized and mortgage interest rates are low. Housing affordability is the best since the early 1970s, when housing starts exceeded 2 million units annually. That said, starts in the years 2008 through 2010 would be the three lowest years since 1945.

• The economies of Europe and Japan, coming off steep declines in 2009, should grow 1 to 1.5 percent in 2010. Construction should improve slightly.

• Our major concern is that central banks will begin raising interest rates and reducing balance sheets too quickly. Economies likely will remain fragile well into 2010, and a renewed downturn would result in an even worse recession than the one just ended. Most central banks acknowledge this risk and indicate no hurry to tighten policies. As a result, we believe the chances of renewed recession next year are low.‹