Global short-term growth revised downwards as economic prospects deteriorate

Author: Media Eghbal

Date published: 3 Dec 2008

In November 2008 the IMF released an update to its October 2008 World Economic Outlook in which it highlighted the deteriorating economic environment and downgraded global real GDP growth forecasts for 2008-2009. Most developed countries are now expected to face a deeper recession than had been anticipated, owing to the global financial crisis of September -October 2008, while growth in developing regions is set to slow more sharply than earlier expected. While the outlook for consumer and business confidence is poor, the new forecasts did predict commodity prices to be considerably lower than previously thought, indicating that inflation should ease in 2009.

Key points

In November 2008 the IMF updated its World Economic Outlook which was released in October 2008. It downgraded its predictions for economic growth in 2008 and 2009, with world GDP growth expected to be 2.2% in 2009 instead of 3.0% predicted in October, and 3.7% in 2008 instead of 3.9% predicted in October;

IMF forecasts have been repeatedly slashed over 2008 as the global financial and economic crisis deepened after first being triggered in 2007 by problems in the US sub-prime mortgage market. The latest cuts were not surprising given the sharp deterioration in the world economic environment in October 2008 when major stock markets suffered further losses and data released by many countries indicated that some economies had already entered recession;

The most substantial downgrades for 2009 real GDP growth are in emerging economies, which are expected to see overall growth of 5.1% in 2009, compared to 6.1% forecast in October 2008. The steepest downgrade was made for the Commonwealth of Independent States (CIS) grouping, excluding Russia, whose 2009 forecasts were slashed from 6.2% to 1.6%. Developing regions are still expected to perform better than developed regions because of less severe internal financial problems and higher innate levels of economic and demographic growth;

Forecasts for advanced economies have also been downgraded with most countries expected to be in recession in 2009. The US economy is predicted to shrink by -0.7% in 2009, for instance, while the UK is set to be the worst-affected of Western European countries with a contraction of -1.3% in 2008, compared to an October forecast of a -0.1% downturn;

Projections for interest rates have also been lowered in the November 2008 forecasts, following sharp cuts in lending rates by many central banks in October and November 2008;

Consumers in most countries face tough prospects in 2009 thanks to a combination of rising unemployment, economic uncertainty and falling property prices. This is likely to have a major impact on consumer spending and on the performance of many retailers and service providers;

The continual (downward) changes to global forecasts reflect the extreme volatility of the world economy, but also the fact that major international financial institutions failed to grasp the extent of the downturn and take measures to limit its impact. This unpredictability is likely to continue in 2009;

Forecasts for commodity prices in 2008 and 2009 have also been cut, with the average 2009 oil price having been slashed by 25.5% between the October and November forecasts. This and steep falls in other commodity prices have eased inflation for consumers in most countries but have severely cut government revenues in many developing countries whose primary exports are natural resources.

Deeper recession expected in advanced economies

The revised forecasts indicate that the situation in advanced economies is likely to be much worse than previously thought:

The US economy – the world's largest – is expected to contract by -0.7% in 2009, whereas October 2008 forecasts had suggested it might avoid recession and grow by 0.1%;

The UK is expected to be the worst-affected country in Western Europe, with its economy predicted to contract by -1.3% against a eurozone average of -0.5% and an October prediction of a -0.1% contraction. National statistics in November 2008 indicated that the UK economy shrank by -0.5% quarter-on-quarter in the third quarter of 2008;

Germany is also already in recession according to national statistics released in November 2008 which showed that the economy shrank by a quarterly -0.5% in the third quarter of 2008 following a contraction of -0.4% in the second quarter;

Japan's economy is expected to contract by -0.2% in 2009, a considerable downgrade from October forecasts which predicted growth of 0.5% in 2009;

In contrast, national statistics released by France in November 2008 indicated that the economy grew by 0.1% quarter-on-quarter in the third quarter of 2008. Nevertheless, the economy is expected to shrink by -0.5% in 2009 according to the IMF.

Forecast real GDP growth for selected regions: 2009

October 2008 forecasts against November 2008 forecasts

Source: IMF

'Contagion' grows in emerging markets

One important element in the revised forecasts is that problems spreading to developing countries have been more extensive than previously thought:

While few emerging markets are expected to fall into recession in 2009, growth forecasts have been sharply downgraded by the IMF in November 2008. In general, emerging/developing markets are expected to grow by 5.1% instead of 6.1%;

CIS and Eastern European countries are faring particularly badly due to overexposure in the financial and real estate markets. The Latvian economy, for instance, is expected to contract by -0.9% in 2008 and -2.2% in 2009, while the IMF has granted emergency loans to Ukraine and Hungary;

China has also been more affected than was first thought. Its forecast 2009 growth has been downgraded from 9.3% in October 2008 to 8.5% in November. India is also expected to grow at 6.3% in 2009 instead of 6.9%. Domestic demand in such countries should continue to keep growth buoyant despite weakening exports;

Oil-producing countries in the developing world are also being affected by the fall in world demand, which has pushed down oil prices from an all-time high of US$147 per barrel in July 2008 to below US$55 in November 2008. This is especially true for countries in the Middle East, which have been forced to curtail domestic investment projects in areas like tourism and infrastructure. However, it benefits oil-importing countries and their consumers, by helping to ease inflation and redressing trade balances;

Some developing countries are facing more severe financial problems. For instance Pakistan was forced to resort to a US$7.6 billion loan from the IMF in November 2008 to avoid a balance of payments crisis. The situation is particularly bad in Pakistan due to political instability, declining foreign reserves and a large trade deficit.

Business and consumer confidence

The worsening news is likely to weigh on consumer and business confidence:

Unemployment is projected to be higher than expected in 2009. A number of major companies in the USA and Western Europe announced significant job cuts in October and November 2008;

Job losses are already having a negative impact on retail sales and consumer spending, and this is set to continue or worsen over 2008-2009. Contrary to earlier analysis, consumer spending in emerging countries has not been immune to the downturn;

Consumer confidence in many countries is deteriorating due to insecurity over job losses and the general economic gloom. This will further limit consumer spending, especially over the critical Christmas/New Year period. Many companies in the UK, for example, have taken unprecedented measures to boost spending with pre-Christmas sales in November 2008;

Overall consumer confidence in EU-27 countries stood at -18.6 in September 2008, compared to -9.9 in January 2008, according to Eurostat, with a zero value indicating that confidence was neither positive nor negative. One of the fastest-dropping indicators was the UK, where confidence fell from -8.8 in February 2008 to -22.6 in September 2008;

The international business environment has in general been affected due to slowing investment, a shortage of credit and a downturn in international demand for most goods and services;

Sectors such as tourism are also suffering from knock-on effects, as consumers– especially those in developed countries – cut back on luxuries such as foreign holidays and companies curtail spending on business travel.

Inflation and commodities

The threat of a slowing economy forced a number of central banks, including the US Federal Reserve, to make significant interest rate cuts in November 2008. This has important implications:

Inflation is predicted to be much lower than had previously been thought. The IMF projects that inflation in advanced economies in 2009 will be 1.4% compared to 2.0% predicted in October 2008, while in developing economies inflation is set to be 7.1% compared to 7.8% under earlier forecasts;

Extremely steep falls in commodity prices have persisted, especially in oil but also in other materials such as steel, due to falling global consumption and demand. This is easing the situation for consumers but is cutting earnings for companies and countries operating in the commodity sectors. In general, developed countries with reliance on imported commodities will benefit while many developing countries, which rely on commodity production and exports, may lose out;

For consumers, lower inflation is generally positive as the costs of most goods and services should increase less quickly than expected, making less of an impact on disposable incomes;

It also makes it theoretically cheaper to borrow money – for instance for mortgages or personal loans – although the credit and banking crisis has meant that the availability of credit is still limited in most developed markets;

Interest rates are expected by the IMF to be lower than under previous forecasts, with the US dollar London interbank offered rate (LIBOR) projected to be 2.0% in 2009 compared to 3.1% expected in October 2008 forecasts.

Forecast London interbank offered rate (LIBOR): 2009

%

Source: IMF

Future scenarios

The IMF described the economic outlook as 'exceptionally uncertain' and it is extremely difficult to project how severe and wide-ranging the recession will be in the rest of 2008 and 2009. There is a possibility of growth forecasts being downgraded further. While the IMF expects a recovery in late 2009 or early 2010, other forecasts believe that the recession will be more prolonged in certain countries, including the UK. Developed economies will in general be the worst affected while developing regions are likely to avoid recession – even though the governments of some countries have sought emergency funding.

Consumers in most countries will face uncertainty and depreciating assets, particularly with the decline in property prices in many countries. On the other hand, lower inflation in 2009 should encourage consumer spending and bank lending to restart. Longer-term effects are expected to include greater regulation of the financial services industry and a stronger belief in contagion between different countries and regions.

Countries and Consumers