Economist: ‘Free-fall is over’

EconomyBounce

Author, Greg Barr

Although the country’s gross domestic product will continue to shrink in the second half of the year, a modest rebound is expected in 2010, according to an economic report.

Nigel Gault, chief U.S. economist for IHS Global Insight, said in a report this week that “after back-to-back declines in real GDP of more than 6 percent (annual rates), the period of economic free-fall seems over.”

Despite the prospects for an end to the recession, Gault points out that a rapid recovery is not in the cards, after such an extreme global financial shock.

“It remains premature to suppose that the financial system has been ‘fixed.’ We expect a 3.1 percent decline in GDP for the year, less severe than our April forecast of 3.5 percent, followed by a 1.5 percent rebound in 2010,“ the report said.

Gault noted that consumer spending beat forecasts in the first quarter by gaining 2.2 percent, following its 4 percent plunge in the second half of 2008, but spending will likely remain flat, at best, through the end of 2009.

As for the housing market, Gault notes that despite the fact that residential construction had its steepest decline so far during this downturn in the first quarter, the outlook is improving.

“Most key indicators of housing activity (home sales, housing starts and permits) are showing signs of stabilization, based upon dramatically improved affordability — for those who can qualify for credit. Even though there will be a delay after housing starts hit bottom until residential construction spending starts to rise, the latter should occur by year-end,” he wrote.

Regarding the energy sector, Gault said drilling activity has not yet finished its downward trend, but is close to the bottom.

Like the rest of the economy’s prospects when the slow recovery begins in 2010, Gault does not expect energy prices to spike quickly as some recent reports have suggested. Oil prices will average $46 a barrel this year, he suggests, rising only to an average of $54 in 2010 and would not move past $75 until 2012.

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