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U.S. to Lead Economic Recovery ... in 2010

Entire World Expected to be Gripped by Recession This Year

NEW YORK - The whole world will be in a recession throughout 2009, economists say, but it will be the U.S. and its strong dollar that lead the world to recovery sometime in 2010.

"The U.S. has been implementing solutions, but other nations have fallen behind the curve," said Richard Yamarone, director of economic research at the Argus Research Corp., at the 2009 Global Economic Outlook hosted by Dow Jones Indexes/Stoxx Ltd. in midtown Manhattan last week.

Thanks to timely, unorthodox moves by the Federal Reserve and the Treasury Department, "the absolute worst in the credit crisis is behind us," Yamarone said, but the economies of every developed country are intertwined with the U.S., and other nations have further to fall, particularly emerging markets. Their future crises will cause global economic aftershocks.

Yamarone said being an optimist today is like "being a candle in a hurricane." If markets are to recover in 2010, it means 2009 will be another stormy year.

"The U.S. economy is in the middle of the longest and most severe recession since the Great Depression," said Christian Menegatti, managing editor and lead analyst at "We expect U.S. GDP will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last around two years."

Menegatti predicts U.S. GDP to be negative 5% in the first quarter and negative 4% in the second, then easing to negative 2.5% in the third quarter and negative 1% in the fourth.

"The economy is highly imbalanced, and this balance has to correct," he said. Fiscal stimulus is projected to push the U.S. deficit to $1.3 trillion in 2009, but even that might not be big enough.

"Forty percent of the stimulus will be in tax breaks to companies, but they are not going to be effective," Menegatti said. "We need a $700 billion stimulus package just for 2009."

The global economy is a complicated game that no one fully understands. Increasing demand for oil in the last few years drove the price to more than $147 a barrel at its peak last summer.

Commodities are tied to the U.S. dollar, so when one goes up, the other goes down. There was talk among members of the Organization of Petroleum Exporting Countries (OPEC) last summer to untie oil from the dollar, but it didn't happen.

Ramifications from the real estate collapse sent markets tumbling, global risk aversion rose to record highs, and investors scrambled for the safety of cash, which happened to be warehoused in U.S. deposits, said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

This surging demand for cash and U.S. Treasurys sent commodity prices plunging. Now cash-and specifically the U.S. dollar-is the safest investment anywhere.

"The dollar has never been stronger, and the outlook for 2009 is also favorable," Woolfolk said. "While the Euro is expected to outperform the greenback and virtually all other currencies early in the year on interest rate differentials, the dollar will remain strong and stable against other major and peripheral currencies."

"It's incredible that the dollar hasn't collapsed," Yamarone said. "It's another example of how resilient we are."

Woolfolk said by mid-year, all of the G-7 countries will join the 0% interest rate club, allowing the dollar to recover ground against the euro.

"Emerging market currencies will fare the worst during 2009 as falling commodity prices, an exodus of foreign investment and high levels of risk aversion conspire to push them lower against the greenback," he said.

There is an expectation that the U.S. will lead the world out of recession, and safe-haven investing will continue to help the U.S. dollar, Woolfolk said.

"Confidence and strength is key," he said. "England will quickly follow the U.S. recovery, followed by continental Europe. Expect emerging markets to be negatively impacted by a global recession."

Last summer, analysts were saying oil could top $200 a barrel. OPEC members were swimming in money, and countries like Russia, Iran and Venezuela were becoming powerful. This rise also led to a political backlash from the U.S. and a push to adopt alternative energy.

Now analysts are predicting crude oil could fall below $20 a barrel. An oversupply will keep prices low and alternative energy plans won't seem as pressing.

"The Saudis would like that because it kills the competition," Yamarone said. While Saudi Arabia can afford lower oil prices for an extended time period, Venezuela, Iran and Russia cannot.

OPEC members will announce cuts, but they will cheat and produce as much oil as they possibly can, he said.

"I don't believe a word that comes out of OPEC," Yamarone said. "Saudi Arabia runs it. Whatever's in their best interest will go on."

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