Executive Summary

  • The recession remains severe, but a bottom is in sight, at least for output if not employment. We expect GDP to begin to grow—albeit slowly—in the second half of the year.
  • Recovery is expected to be slow, since credit conditions will stay tight. The economy still contracts 3.0% during 2009, before growing 1.4% in 2010. The unemployment rate reaches 10.3%.
  • Deflation fears have receded. Inflation remains a risk for the future, but not an imminent threat. Headline CPI inflation is in negative territory and wage inflation is falling, not rising.
  • Bond yields have backed up as fears for the economy have diminished. But we think that it is too soon for a major bear market in bonds. Governments and central banks are trying to unfreeze lending markets, but credit conditions will ease only slowly. "