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Global Chartbook

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November 2008

Fri, Nov 14 2008, 09:09 GMT
by Jay Bryson, Tim Quinlan

Wachovia

Executive Summary

It Appears That a Global Recession is Underway

Global economic 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 slowed in most countries in the first half of 2008, and it appears that many major economies have now slipped into recession due in part to the effects of the global credit crunch. We project global GDP will expand only 1.7 percent in 2009, the slowest year for global growth since 1991. Although steps announced by governments over the past month or so appear to be leading to a gradual relaxation of financial market tension, credit markets remain very fragile. Underlying all of our projections is our assumption that policymakers will take the necessary steps to prevent the global financial system from locking up again. If that assumption proves to be overly optimistic, then global economic growth would end up even weaker than our already grim outlook projects.

Real GDP in the United States declined at an annualized rate of 0.3 percent in the third quarter, and a sharp contraction in the current quarter seems very likely. Indeed, we project that the United States will experience its most serious recession since the 1981-82 downturn. Although real GDP growth should turn positive again in the middle of 2009, the upturn likely will be sluggish as consumers continue to repair battered balance sheets. Indeed, we project that real GDP will grow only 1.4 percent in 2010, well below the 3.1 percent annual growth rate the economy averaged between 1992 and 2007. The Fed has cut the fed funds rate by 425 basis points since last September, and it is likely the FOMC will ease again as the economy contracts further.

Recessions appear to be underway in other major economies as well. Real GDP in the United Kingdom fell at an annualized rate of 2.0 percent in the third quarter, the first drop since 1992. Unfortunately, further declines in British GDP over the next few quarters appear certain. Japanese growth turned negative recently, and the Euro-zone economy has also contracted for two consecutive quarters. Growth in Canada has remained positive thus far, but it seems like only a matter of time before the sharp downturn in the United States pulls Canada into recession. In other words, every G-7 economy is either in recession at present or about to slip into one.

Foreign central banks have eased policy recently in response to the marked deterioration in the economic outlook. The European Central Bank has cut its policy rate by 100 basis points since early October, and the Bank of England has slashed rates by 200 basis points over that period. We look for more easing in the months ahead as economies contract further.

Economic growth in the developing world has also slowed this year. For example, real GDP growth in China, which had risen as high as 12.6 percent in mid-2007 eased to 9.0 percent in the third quarter of this year, the lowest year-over-year growth rate since 2002. Further deceleration in most developing economies in 2009 appears to be almost certain. That said, economic fundamentals in many developing countries are generally stronger today than in the past, making those countries more resilient to downturns in the developed world than in previous cycles. Although some individual countries will experience recession the developing world in general will probably continue to experience positive economic growth, albeit at a rate that is significantly slower than the average of the past few years. The International Monetary Fund recently signaled its intention to support growth in the developing world by extending loans to Hungary and Ukraine. Further IMF lending programs could be forthcoming in the months ahead. The Fed has also supported important trading partners through its provision of swap lines to central banks in Brazil, Korea, Mexico and Singapore.

Inflation rates in most countries shot higher in the first half of 2008 and commodity prices went through the roof. However, commodity prices have subsequently collapsed as economic growth has slowed sharply. Indeed, if there is a silver lining to slower global growth, it is that global inflation should recede significantly next year, giving most central banks scope to cut rates further. After rising to nearly 6 percent in 2008, which is the highest rate in about 10 years, global inflation should recede to about 3 percent in 2009.

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Published on  Fri, Nov 14 2008, 09:14 GMT