The global economy is likely to recover in 2010 with the US housing market showing some life but economic growth may remain sluggish for several years.

US economics firm Global Insight says that it will be 2010 before the world economy rebounds.

"World economic growth in 2009 is likely to be the slowest since 2003," Chief Economist Nariman Behravesh said. "Every world region's growth is expected to slow next year, and the list of countries in or near recession is expanding."

Economist Stephen S. Roach, Chairman of Morgan Stanley Asiasays no economy can live beyond its means in perpetuity. Yet like others that have tried to do so in the past, the US thought it was different. America’s current account deficit surged from 1.5% of GDP in 1995 to 6% in 2006. At its peak annualized deficit of $844 billion in the third quarter of 2006, the US required $3.4 billion of capital inflows from abroad each business day in order to fund a massive shortfall of domestic saving.

Roach says over the past two decades, America has had an audacious shift from income- to asset-based saving. The US consumer led the charge, with trend growth in real consumer demand hitting 3.5% per annum in real terms over the 14-year interval, 1994 to 2007 – the greatest buying binge over such a protracted period for any economy in modern history. Real disposable personal income growth averaged just 3.2% over the same period.

The binge was financed through equity release loans on homes and consumption rose to a record 72% of real GDP in 2007. It was "manna from heaven" for Developing Asia, but with the US consumer in trouble, Roach says Asia's export-led growth dynamic, may now be at risk.

Stephen S. Roach says that the global economy is facing a multi-year rebalancing.

For the US, this spells a sustained deceleration in personal consumption growth as households abandon newfound asset-dependent saving and consumption strategies in favour of the income-led fundamentals of the past.

"The US, in my view, will now have to come to grips with a much slower growth trajectory – with real GDP growth likely to slow from the 3.2% trend of the past 13 years to no higher than 2% over the next 2-3 years, or longer," Roach says.

"This should prove to be a very challenging outcome for the rest of the world – especially for those developing nations, which have derived so much of their economic sustenance from exporting goods to over-extended American consumers," he adds.

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Eurozone Economy may perform better than expected

Ralph Atkins of the Financial Times today details 12 reasons why the Eurozone economy may perform better than expected, in coming quarters.

Atkins says that what has made global economic events so compelling in the past year has been the pace at which perceptions have changed. The eurozone is no exception. After a growth sprint at the start of the year, the region’s economic fortunes appeared to deteriorate as fast as those of Liu Xiang, China’s hobbled Olympic hurdler. Growth contracted in the second quarter for the first time since the euro’s launch in 1999, while the US expanded.

But he asks: Has the eurozone’s outlook really worsened so dramatically? Change is usually incremental in the bloc’s economy, reflecting cultural and structural differences with more dynamic parts of the world. The latest evidence – August’s purchasing managers’ indices released last week – suggested prospects had stabilised in the third quarter, albeit with the eurozone still dicing with recession. "So here, at the risk of making my job less exciting, are a dozen reasons why the eurozone economic malaise might have been exaggerated and why we could even see positive signs in the coming months," he says.

Morgan Stanley does not expect major monetary easing soon

Joachim Fels of the London office of US investment bank Morgan Stanley, says that the global economy remains mired in a stagflationary situation, with the advanced economies broadly stagnating, growth in the emerging world slowing, and inflation uncomfortably high and exceeding central banks’ targets almost everywhere around the globe.  While stagflation creates a dilemma for central banks, most have opted for reacting to ‘flation’ rather than to ‘stag’ so far this year.  In fact, 23 of the 36 central banks in developed and emerging countries that our global economics team monitors and forecasts regularly have raised interest rates at least once this year.  By contrast, only five (the Fed, the Bank of England, the Bank of Canada, the Reserve Bank of New Zealand and the Czech National Bank) have lowered rates since the end of last year.

"However, hopes that the global tide for rates is turning and many central banks will embark on a major easing path are greatly exaggerated, in our view," Fels says.

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