Does the U.S. Economy Need Another Fiscally Expensive Stimulus Package?

• There have been large delays in implementing spending measures under the February 2009 fiscal stimulus package. Impact of tax cuts on consumption might be limited as consumers increase savings. As the economy is still weak and the unemployment rate is rising steadily, there are calls for a second stimulus package that is more front-loaded and targets the unemployed and cash crunched state governments. This comes at a time when estimates of trillion dollar fiscal deficits and unsustainable debt levels are raising inflation expectations and putting upward pressure on long-term yields, thus partly undoing Fed’s monetary easing.

• The administration hasn’t endorsed a second stimulus package yet due to concerns about long-term fiscal sustainability. Passing another stimulus bill in the Congress might be very challenging. However, several people in the administration have said that the economic downturn has been worse than initially estimated, and the impact of the current stimulus might fade by 2011 which might pull down GDP growth again if private demand is slow to recover.

Chinese Banks Renew Lending Surge: Future Risks?

• Lending surged in H1 2009 to 7.37 trillion yuan (US$1.08 trillion), more than 3 times higher than H1 2008, 47% more than the government’s target of 5 trillion yuan for 2009, and one-fourth of China’s annual GDP. April and May 2009 showed a slowdown in new lending (though still remained well above 2008 levels), but loans reached 1.53 trillion yuan (US$224 billion), a return to Q1 2009 levels. New loans could surpass the revised 10 trillion yuan benchmark for 2009. The scale of loan extension has sparked sustainability concerns, raised the risk of non-performing loans, and helped to fuel asset price inflation (property and equities).
• Banks lent 1.53 trillion yuan (US$224 billion) in June 2009, more than double the 664.5 billion yuan loans extended in May 2009, sparking concerns that tightening may be needed. The Central Bank may have already started to tighten, with the bank selling more bonds to soak up some of the new liquidity. (Bloomberg

Global Economic Outlook: Is a Recovery In Sight?

• IMF (July 2009): The global economy is beginning to emerge from the recession „but stabilization is uneven and the recovery is expected to be sluggish.“ Economic growth may be 0.5 percentage points higher than projected in April 2009 or a 1.4% contraction in 2009 and 2.5% growth in 2010. Advanced economies will contract by 3.8% in 2009 – the U.S. by 2.4%, eurozone by 4.8%, Japan by 6%, UK by 4.3% and Canada by 2.3%. Eurozone will continue to contract in 2010 (0.3%) while U.S. (0.6%), Canada (1.4%), Japan (1.7%) and UK (0.2%) will have below potential growth.

• IMF (July 2009): Emerging markets will slow sharply, growing by only 1.5% in 2009 before rebounding to 4.7% in 2010 (lower than the 6% in 2008). China to grow 7.5% in 2009 (8.5% in 2010), India 5.4% (6.5% in 2010). ASEAN to contract by 0.3% in 2009 before growing 3.7% in 2010. Latin America (-2.3%), Eastern Europe (-5%) and Commonwealth of Independent States (-5.8%) will all face contractions in 2009 and sluggish growth in 2010 while the Middle-East will grow only 2% in 2009.