What to expect in 2009?

Stabilizing the economy will be the main priority of government policy in the first half of 2009. Both monetary and fiscal tools will continue to be employed aiming at restoring a sense of normalcy. New and effective strategies will have to be devised to replace those such as interest rate policy that have run their course as the Fed takes on a more “activist” role. Jumpstarting the economy will also require careful maneuvering given the unprecedented and uncertain nature of the crisis. Irrespective of the attempts towards stabilization, certain key factors such as the decline in housing prices will need to show signs of bottoming out before improvements can be hoped for.
2009 will be a challenging year for government institutions as they sort out a strategy to deal with the structural changes in their balance sheets and the quasi nationalization of the banking sector (risk taking has effectively been transferred from the investment community to government institutions). They will have to keep a close eye and tackle further disruption in the system as the crisis spreads to other areas such as commercial mortgages, auto and credit card loans and sectors that have yet to manifest themselves.
Confidence having suffered the most during this downturn will take plenty of time to heal as the full extent of the damage becomes apparent and government policy works its way through the system. Although there is still a long way to go, there are signs that confidence may be returning as mortgage yields begin to decline and the TED spread narrows.
A global recession which begun last year is likely to last throughout this year and possibly beyond as households cut back on consumption and business postpone capital expenditures. On the other hand, 2009 could turn out to be a transformational year, as a new administration with a penchant towards increased regulation takes over the helm of the U.S. government. Regulation in itself should not be viewed negatively (we have certainly witnessed the effects of the opposite extreme) as long as it is carried out in a manner that doesn’t hinder productivity or growth.
In this context, with the combined effects of having all the “bad news” out in the open, signs of bottoming out for various key indicators, the prospects of a large stimulus package passing through and continued vigorous government attempts to turn things round, we may see a strong rebound in the stock market sometime towards the second half of the year. The vigorous attempts to jump start the economy will, however, bring new threats in the form of inflationary pressure which means that governments will have to be extra careful not to miss the early warning signs and react before it is too late.
We expect 2009 to be a challenging year but for different reasons than those that defined 2008.