2010 Predictions: Economy

1. Global Economic Growth Stalls -- Emerging Market bright spots (China, India, Brazil) will remain, but overall growth sputters as worldwide stimulus fades. Ex-stimulus growth rates in most of the developed economies will be < 2%.

2. The Mythical Consumption Re-balancing assumption of the IMF will not be seen in 2010. China's growth continues to be driven by production and asset purchases, not consumption. Chinese policy has, and will continue to be, driven by a different objective function than the western "Washington consensus".
3. (Measured) Inflation remains tame -- continued technology absorption, excess capacity, outsourcing, and growth in the global work-force will keep downward pressures on prices. CPI (ex-energy) will continue to be tame. Asset price inflation (from global liquidity) will continue to put pressure on broader measures of inflation, but will continue to be ignored by policy makers in official decision statements.

4. US Unemployment to remain ~20% (U6).  The census will add ~800,000 workers as will other parts of the US government. However, the average employer will remain conservative on hiring. Corrections in global stock markets by the second half of 2010 will further reduce risk appetite for real (i.e. non-financial asset) decisions.

5. Acceleration in US banking failures as the impact of the real estate bubble finally hits the balance sheets. The prospect of further (big and small) banking bailouts in 2009 will be one of the fascinating political stories of the year. Can massive rent-seeking continue even in an election year?

6. Service Sector innovation will flourish -- increasing self-employment and free agent behaviors will lead to service sector productivity gains. Emerging markets with abundant labor will lead introduction of new in kind service sector models.

7. The Global Rollup of Excess Capacity Industries gains momentum -- from steel to auto to durable goods manufacturing. As global demand recedes inventory and excess capacity management will be the critical capabilities.

8. Excess capacity in non-tradeable sectors, such as real estate, will remain unresolved. Pricing mechanisms will continue to be distorted sending (small) expansionary signals for capacity. Expect both rent-seeking and innovative behaviors in the non-tradeables sector.