Bleak year for global economy in prospect
Tue, May 5 2009, 13:26 GMT
by Trevor Williams
The world economy is currently experiencing its steepest downturn since the 1940s, with global trade expected to contract by 10% this year, see chart a. Global economic output could fall by 2%, with growth in the advanced economies dropping by at least twice this rate, around 4- 5%. This is the first time that there has been a synchronised downturn amongst the major economies since the 1930s. It is interesting that the emerging markets are weathering the downturn much better than the advanced economies and better than at any time in their history - but they are not immune, as shown by including data for China in all the main country charts below. Overall, however, the emerging markets as a bloc is likely to escape an outright fall in economic output this year, see chart b, due primarily to China and India.
Sharp contraction is evident in backward looking quarterly data...
Recent economic data put the severity of the fall off in growth in perspective, see chart c. For the US, economic growth fell by a 6.1% annualised pace in Q1 2009, after a fall of 6.3% in the fourth quarter of last year. This means that the US has seen the biggest cumulative fall in output since the 1950s, and the likelihood is that there will be a further fall in overall economic output in the second quarter as well. But output is not just collapsing in the US, it is a global event. In Japan, the second biggest economy in the world, annualised gdp fell by 12.1% in Q4 2008 and the prospect is for a similar decline in Q1 of this year. For the UK, economic growth fell by 1.6% in Q4 2008 and by a further 1.9% in Q1 this year. For Germany, economic growth contracted at an 8.4% annualised rate in Q4 2009 and an even bigger decline in on the cards for Q1 based on indicators for the first quarter.
...despite better than expected monthly data, which only suggest an easing of the recession not a recovery
Monthly data are currently suggesting that the fall in global economic output in Q2 may be less severe than in Q1 or Q4 last year but the decline will still be significant. In short, the recession is not yet over and so the trough of the downturn has not yet been reached. The signs are that global contraction will persist in most economies into the second half of 2009 and possibly into the first half of 2010. What has led the decline? Clearly, the collapse in global trade and export volumes, see chart d. In terms of sectors, thus far, manufacturing has led the slowdown, with latest monthly data showing annual industrial output down by 38.4% in Japan, by 20.6% in Germany, 12.8% in the US and 12.2% in the UK, see chart e. What are the reasons for this? One is that the initial adjustment to recession has been led by the company sector because weak global demand and the financial crisis has already severely hit international trade. For instance, US exports were down by 34% in Q1; in Japan exports are down by around 50%; in Germany by around 40%. Higher unemployment from company cut backs mean that consumer spending will likely fall sharply in due course, and take over as a key driver of the downturn, see chart f. A further leg to the downturn may well be reflected in even weaker consumer spending than seen so far as a result of second round effects from rising unemployment. But there are reasons to be optimistic that recovery will occur in time, given the unprecedented policy loosening that has taken place around the world. Lower oil prices and weakening consumer price inflation will also boost real household incomes and global economic recovery is likely to be occurring by the first half of 2010, accelerating in the second half of that year and led by the emerging markets, see chart b.
UK economy still contracting sharply, but the pace should ease in the second quarter of 2009
For the UK, the recovery profile may be less pronounced but there is an additional positive growth impulse coming from a fall in the pound’s exchange rate of around 27% on a trade-weighted basis. This will boost UK growth once the world economy starts to recover. In particular, it will help export industries and firms in the import substitution arena, either in services or manufacturing. Agriculture, food drink and tobacco industries are resilient in downturns, as are high tech and health, education and telecoms industries. But a lower exchange rate cannot offset the sharp fall in world trade volumes that is underway or the global financial crisis, and so the UK economy will contract at least in line with the average of the advanced economies.
In this environment, interest rates will remain at record lows and the currency will likely stay weak and potentially volatile. The hard truth is that significant economic recovery is unlikely until next year and even then not perhaps on a sustained basis until the second half of the year. Recovery back to a faster pace of economic growth, say to the UK trend rate of the last 10 years of 2.9%, is now looking unlikely until 2012 or beyond. Although a bottoming out of the downturn is likely in Q2, if the monthly data continue to suggest only stabilisation at low levels of activity, any recovery in consumer spending seems some way off. Rising unemployment, a weak housing market, high debt levels and rising bankruptcies are likely to keep retail sales under pressure. Massive fiscal and monetary loosening will eventually have its intended effect, but the lags involved suggest that world and UK recovery is not yet underway.
