Economic Outlook for 2010 Bank of America Merrill Lynch, Morgan Stanley, and others Weigh in

Bank of America Merrill Lynch, Morgan Stanley, and Other Banking Giants Weigh in.

The big question on everyone’s minds has to do with the end of the recession and projected growth for year 2010 and beyond. Four world banks give us a brief synopsis of their projections as they strive to determine if this turnaround is really the end of a recession or are we due for more pain in the near term?

According to Bank of America Merrill Lynch, the recovery will be slower than what is normal for an economy coming out of a major recession. With the economy operating under massive spare capacity, they expect core inflation to drop a bit and most central banks to remain on hold through the first half of the year. They expect a muted recovery in developed economies to mean low core inflation and a steep yield curve in 2010. Rising longer term rates make government and corporate bonds less desirable. While there are sectors where the USD does show strength, there still is a fair amount of weakness.

This year has seen the biggest peacetime contraction of the GDP since 1945, and Commerzbank expects a rebound of 3% in 2010, with Asia making the biggest contribution. They also cite a huge amount of spare capacity due to the collapse in global output which will result in higher global unemployment and lower inflation.

BNP Paribas expects Emerging Markets to do better as they usually have a lower spare capacity. They are also more at risk due to that lower capacity so one has to be on the lookout for signs of inflation. Emerging markets will have to tighten sooner than the G7 (the world’s largest economies). They also urge world leaders to watch central banks liquidity management closely as they will be a major driving force markets next year.

Morgan Stanleycontends that the common theme for global economies and [the] market in 2010 is that stimulus will be removed. In 2009, economic recovery was a response function to the implementation of fiscal and monetary stimulus. So, in 2010, economic recovery and market performance will be a response function to its withdrawal. The withdrawal will come in the form of tighter policy, increased cost of liquidity, and regulation. The goal will be to shift the process of government induced growth and shift it back to the private sector while maintaining tight regulation.