19 February 2009
Vanessa Rossi
(Former Chatham House Expert)


Getting to grips with the full implications of this extraordinary recession has been extraordinarily difficult. Forecasts have been steadily downgraded each month as the prospect of widespread, substantial declines in GDP and a massive fall in world trade and investment has unfolded. However, the pace of change is starting to slow. As economies are approaching what will probably be the nadir of the downturn, forecasts are converging towards more realistic assessments of the losses in GDP in 2009.

A fall in GDP of as much as 2-3% has been widely expected in the US and UK for some time but other major European economies have now accepted this view as well. Indeed, Germany may see an even worse performance in early 2009, which explains the recent rush to boost its proposed fiscal package. Although Spain's economy has been weakening for some time, the situation is still deteriorating. The ECB appears to be inching towards joining the US and Japan in a zero interest rate policy.

By now, IMF and consensus forecasts are close to painting an accurate picture for the OECD, although adjustment is still needed for a few countries; for example, Japan where GDP is now seen falling by at least 3-4% but possibly as much as 10%. So, despite many commentators encouraging the view that the UK will be the worst affected of the major developed economies, it may not be after all.

Figures 1 and 2: Forecasts for OECD and non-OECD growth vs Historic Recessions point to severity of crisis (IMF and own estimates, January 2009)

Emerging Market Economies Under Stress

For emerging markets, official forecasts are further behind the curve. There have been considerable delays in recognizing the inescapable negative impacts from the extreme contraction in global capital flows and credit, exports, commodity prices, industrial production and investment. Even if there are no 'bad banks' in the emerging-market economies and their consumers are relatively immune to the immediate impacts of the global crisis (both big ifs), there has been a loss of confidence around the world. This is partly, and logically, because many people foresee the knock-on effects that will put their economies and livelihoods at risk.

Forecasts have not only been lagging events and news but they have also shown little differentiation, with reluctance to discriminate between those countries facing a poor year (GDP falling by up to 3%) and those in serious trouble (at risk of 5-10% fall in GDP).

The most obvious casualties are those already in the IMF queue for assistance: they are the countries most immediately affected by the freezing up of global capital flows and credit because of existing external deficits and debt. The casualty list is notably dominated by Eastern Europe where the credit crunch, together with a heavy burden of foreign debt (including hard currency mortgages and consumer credit) are causing a severe financial crisis. Turbulent reactions in currency markets indicate expectations of a slump in this region and also in neighbouring Central Asia, exacerbated in some cases by weak commodity markets.

Some countries have clearly been very aware of the risks and realistic about the damage: notably Turkey quickly began negotiations with the IMF for standby funding, being well aware of the need for this agreement, whereas other counties have been delaying this decision. The IMF is examining ways of boosting its finances to cope with further demands and the World Bank will also provide help for the poorer developing countries.

Asia has generally been well ahead in its own forecast assessments: for example, Singapore recently revised its forecast to predict a 5% decline in GDP in 2009, far worse than in 1998 or 2001, an admission which is brutally realistic and honest. China is often criticised for not revealing what others claim to be the true economic facts (claims that have not necessarily been based on reliable analysis) but in this case a drop in growth to just below 7% has been reported for the end of 2008. The government was also ahead of Europe in admitting that it will be hard to fight off the slowdown that is submerging world growth and trade in spite of rapidly relaxing monetary policy and a massive fiscal boost that has been rushed through to support the Chinese economy.

Although around half of Asian trade is now internal to the region, exporters are still highly dependent on US and EU demand, rapidly seeing the repercussions of the economic crisis. While sizeable losses were expected, falls of 30-40% in exports, as reported by countries such as Korea and Taiwan as well as Japan since November, have been jaw-droppingly bad. These have led to further downgrades in economic forecasts and the possibility of double-digit declines in GDP in 2009. While emerging Asia is still expected to grow in 2009, a predicted rate of 2-3% is even lower than the average in 1998. This forecast is heavily reliant on relatively robust estimates for China and, to some extent, India - if these fail, it is possible that Asia's average growth rate may be close to zero. Given the size of Asia and its imports, such a decline would create further negative impacts on the rest of the world including commodity markets.

The energy economies, primarily the Middle East and Russia, are also seeing growth cut back to close to zero (less for Russia, probably slightly better for the GCC region) owing to the impact of export revenues tumbling to less than half last year's level. Meanwhile Latin America is feeling the negative effects of falling commodity markets, cutting output and prices in metals and minerals as well as demand for manufactures and even food products.

In Brazil, industrial production will be down by around 15% year-on-year in early 2009, similar to the falls seen in the big recessions of 1981 and 1990. This suggests that economic growth will be negative in 2009, with the level of GDP falling by 3-5%, far worse than during 1998-2001. In fact, Brazil saw a series of dips in GDP in the early 1980s global recession and again in 1988-1993: there was difficulty in stabilizing the economy in part because of fragile finances and a tendency to devaluation and inflationary spirals. Having reduced these risks, Brazil is now believed to be far better placed to weather this recession and recover strongly. Chile is in a similar position and, to some extent, the same is true of other South American economies while Central America could be harder hit by the impacts from the US. Given its substantial trade and labour links to the US, Mexico will inevitably see a deep recession in 2009, with losses in oil revenues adding further pressure - peso devaluation points to expectations of financial distress.

Africa has also seen a reduction in growth expectations and will be lucky to achieve 2-3% in 2009 - versus 5-6% in recent years. Low-income countries are likely to see recent positive results in terms of poverty alleviation compromised due to continuing shocks from the food/fuel-price crisis and now the global economic downturn. For these countries, the impact of the crisis has manifested itself through reduced demand for exports, falling commodity prices, difficulty in accessing international capital markets and, particularly important for such poor developing countries, decreased remittances from abroad.

Both the IMF and the World Bank have urged donor countries to live up to their promises of increased development assistance even though there are severe effects of the financial crisis on their own budgets. The consequences of the crisis for the world's poorest people are not limited to Africa, and it is estimated that up to 90 million people globally may be pushed into extreme poverty due to the recession.

Domino effects, causing activity to spiral down, are a serious threat that could both deepen the recession and prolong recovery. And after such a massive lurch in the global cycle, instability may well persist, so the recovery may be very uneven indeed.

Further Information

The Global Economy 2009: Forecasts Still Falling
Chatham House Briefing Note, Vanessa Rossi, February 2009