CITI Global Econ Outlook and Strategy

Plumbing the Depths

The spread and severity of the global recession is heightening the obstacles to effective policymaking.
Despite improving U.S. credit conditions, financial and economic weaknesses have become mutually reinforcing.
Imminent fiscal measures and continuing financial and monetary policy efforts will likely buoy U.S. demand, but risks of deflation remain elevated.
In the face of a deepening euro area recession, we expect the ECB to cut rates to 0.5% in mid-2009 and to take more unconventional monetary measures.
The BoJ will likely focus on supporting dysfunctional financial markets by assuming credit risk and pushing down longer interest rates.
The deepening global recession is creating greater challenges to policymaking in emerging markets, where fiscal flexibility is challenged and capital outflows limit monetary policy easing.
China may have passed its cyclical bottom, but hurdles remain on the path to recovery.
Beyond managing cyclical recovery, markets will likely face more challenges to growth post the recession due to a rise in the cost of financial intermediation.