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Global Chartbook

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October 2008

Fri, Oct 10 2008, 07:58 GMT
by Jay Bryson, Tim Quinlan

Wachovia

Executive Summary

It Appears That a Global Recession is Likely

Global real GDP growth averaged nearly 5 percent per annum between 2004 and 2007, the strongest four-year period of growth in decades. However, real GDP growth rates have slowed in most countries this year, and we look for further deceleration in 2009. Indeed, we project that global GDP will grow only 2 percent in 2009, the slowest year for global growth since 1993. If credit markets remain frozen for a prolonged period of time, global growth next year could be even slower than our official projection. Indeed, it is very difficult to forecast with any reasonable degree of certainty during the middle of a global financial crisis. Underlying all of our projections is our assumption that policymakers will take the necessary steps to prevent the global financial system from completely imploding.

We project that every G-7 economy will contract somewhat over the next few quarters. Growth in the developing world should slow further next year as well. However, economic fundamentals in many developing countries are generally much stronger today than in the past, making those countries more resilient to downturns in the developed world than in previous cycles. That said, most developing countries will probably experience the slowest year of growth since 2002.

The U.S. economy has been struggling for the past few quarters as it works through the fallout from the housing bust and credit market dislocations. Although the economy continued to expand in the first half of the year, due largely to record contributions from net exports, it now appears that the United States has slipped into recession as credit markets have essentially shut down. We project that the U.S. economy will contract for three consecutive quarters. Although growth should return in the middle of 2009, the upturn likely will be sluggish as consumers continue to repair their balance sheets. The Fed has cut the fed funds rate by 375 basis points since last September, and we look for some more easing in the months ahead as the economy contracts further.

Recession appears to be taking hold in other major economies as well. For example, it appears that the United Kingdom has slipped into recession, and we look for U.K. economic activity to contract for a few more quarters. Japanese growth turned negative recently, and the Euro-zone economy will probably contract modestly over the next few quarters. The Bank of Canada, the Bank of England, the European Central Bank, and Swedish Riksbank, and the Swiss National Bank joined the Federal Reserve on October 8 in a coordinated easing of monetary policy. Looking forward, we expect most foreign central banks will cut rates further as growth slows and as inflation recedes.

Why has growth slowed abroad? First, exports to the United States from many countries have weakened. Second, dislocations in credit markets since last summer have weakened growth in countries that are extensively financed via capital markets and/or experienced significant run-ups in house prices. Third, the sharp rise in the price of oil earlier this year has eaten into real income in many countries, leading to slower growth in consumer spending. Finally, central banks in many countries tightened monetary policy in response to rising inflation rates that have been engendered by the sharp rise in the price of oil.

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Published on  Fri, Oct 10 2008, 07:59 GMT