The FINANCIAL — In Washington, the Institute of International Finance, an association of world financial institutions, has issued a grim economic forecast, saying that all of the major economies are weak or in recession.
The institute says global growth in 2009 will be negative for the first time since reliable statistics became available in 1960. Growth is projected to be minus four-tenths of one percent, compared to 2008 growth of nearly two percent.
How long will recession last?
Report says says U.S. and European joblessness in the current downturn is likely to peak at no more than 8 percent.
"Comprehensive, coherent and globally coordinated policies are essential to strengthen financial markets and revive growth," says IIF Managing Director Charles Dallara.
“Steep declines in real gross domestic product are likely in the current quarter and in the next quarter in the United States, the Euro-zone countries and in Japan. Overall, 2009 will see falls in output in these countries and rising unemployment, but a revival of growth may start in the late summer of next year, forecast the economists at the Institute of International Finance. World GDP is expected to decline for the first time in recent history in 2009 with a projected fall of 0.4 percent, after a 2 percent gain this year”, report says.
The IIF forecast that the U.S. economy will decline by 1.3 percent next year after an advance of 1.2 percent this year, while the Euro Area economies fall by 1.5 percent in 2009 after a 0.9 percent drop in 2008, and Japan’s economy falls by 1.2 percent next year after zero growth this year.
The IIF predicted further slowing in the leading emerging market economies, although their average growth rate in 2009 at 3.1 percent, after 5.9 percent in 2008, will exceed that of the mature economies by some 5 percentage points. Particularly weak growth is seen in central, eastern and southern Europe with growth of just 0.3 percent likely for 2009 after 4.5 percent in 2008.
Stronger growth is seen in Asia/Pacific, yet here too there is a significant slowing with growth in the region as a whole seen at 5.7 percent after 7.4 percent in 2008 – the forecasts include growth for China in 2009 of 6.5 percent after 9.3 percent this year, and a slowing of India’s growth to 5 percent from 6.2 percent last year.
“We now face extraordinary challenges”, IIF Managing Director Charles Dallara said.
“The extent of the declines in the major economies in the current quarter and in the next quarter or two may be substantial, with the U.S. and the Euro-Area likely to see falls in real GDP in the fourth quarter of this year of respectively 5 percent and 3 percent. The weakening of economic activity and intense financial market strains are feeding on each other and are reinforced by the global synchronization of the slowdown. On the positive side the authorities in North America, Europe, and in Japan, are fully cognizant of the scale of the crisis, the need for effective measures to counter it, and the imperative of international policy coordination.”
“Building on the strong and extraordinary measures taken by the U.S. and European governments and central banks, the authorities should now further advance comprehensive, coherent and globally coordinated policies. Actions should focus on relieving funding pressure, stabilizing troubled asset markets by purchase programs or ones that separate good from bad assets on bank balance sheets, and injecting capital as required. Simultaneously, macroeconomic support with a combination of monetary accommodation and fiscal stimulus is essential. In the United States, measures are also necessary to reduce home foreclosures. At this juncture, where businesses, households and the financial sector are all pulling back, there is little choice for the public sector other than to act to stimulate demand. Nevertheless, it is important to recognize the looming fiscal challenges and governments need to begin to lay plans to address them.”
“We are seeing an increasing number of banks take measures to address the weaknesses exposed by the crisis and adopt best practices. These efforts, in conjunction with the actions take by the authorities, such as this week’s decisions by the U.S. Federal Reserve Board, will contribute to the restoration of confidence and revive credit flows in due course. We trust that coherent fiscal and monetary policies throughout Europe and in Japan will play their full parts in restoring conditions conducive to the resumption of sustained global growth.”
The IIF said that reported losses at financial institutions since the start of 2007 amount to over $1 trillion, while institutions have raised about $930 billion since mid-2007 with more than one-third of this volume coming from the public sector.
Hung Tran, Senior Director of the IIF’s Capital Markets and Emerging Market Policy Department said, “It is important to realize that for many banks, credit losses have exceeded mark-to-market losses on their mortgage and credit portfolios. The weakening economy will increase credit losses, continuing to put pressure on bank capital. This underscores the point that capital injection alone will not be sufficient to strengthen the banking system until the economy and financial markets stabilize.”
United States: Today’s IIF report noted that a major catalyst of this recession is the sudden spike in global liquidity preference that came to the fore directly after the collapse of Lehman Brothers in mid-September. The rush to cash by banks, non-financial businesses and consumers led to a sudden, broad-based weakening in global demand, especially for durable goods and discretionary services. The plunge in demand for autos, consumer electronics and capital goods has been sudden and widespread. It seems that manufacturers have been alive to the risks of unwanted inventory accumulation, and have adjusted production rapidly in the face of shrinking demand.
“Not only is the economy now contracting sharply,” said IIF Macroeconomic Analysis Director Philip Suttle, “but we are also seeing an array of near-term sharp adjustments underway. These include an extraordinary decline in the current quarter of nominal consumption at an annual rate of about 8 percent, and a no less exceptional rise in the savings rate towards 5 percent.”
“We are also seeing extreme weakness in housing, commercial construction is declining, and business equipment investment is falling. We anticipate several months of major decline in output, but there is a prospect that the combination of the monetary and fiscal policy will gain traction to the point where the economy starts to show positive growth, possibly in the third quarter, from what will be depressed levels.”
The IIF said that uncertainties surround the U.S. fiscal policy stance of the incoming Administration and Congress. For working purposes, the IIF is assuming that rapid action will be taken in 2009, leading to a net discretionary expansion of the Federal deficit of the order of $500 billion in the current fiscal year ending September 30, 2009.
Euro-Area: The IIF’s report today stated that the Euro Area is facing the biggest challenge in its ten year history. Measures of business activity have collapsed in the past two or three months, suggesting a deep decline in fourth quarter GDP. Moreover, the financial difficulties in the region, as well as to the East, have intensified, and housing weakness is spreading. The boost from other parts of the global economy is fading, while domestic policy support has been less forthcoming than in the United States (and United Kingdom). As a result, the IIF expects the recession in the Euro area to persist for longer than in either the United States or Japan, stretching through most of next year. The outlook underscores the importance of strong action by the European authorities.
Japan: Very substantial weakness is seen in Japan’s economy because it remains very heavily geared to the global industrial cycle, especially durable goods (both consumer and capital goods). The sudden plunge in global auto sales is creating intense pressures in Japan as well as Detroit. Additionally, the renewed spike in global risk aversion in mid-September has caused a spike in the yen’s real effective exchange rate, which has risen by about one-third in the past year. The IIF forecast that after significant declines in GDP this quarter and next, the economy will make a modest rebound. This will be due to the combination of a banking sector less under stress than elsewhere, modestly expansionary economic policies, the ravages of the global inventory cycle will fade, which will help Japanese industry to rebound somewhat, and the positive effect of lower oil prices.
Emerging Markets: The IIF noted that the performance of these economies will be broadly weaker in 2009 compared to recent years, but emerging Asia will do better than other regions and this is particularly influenced by three factors:
Monetary policy. There has been a striking contrast over recent weeks between monetary policy in emerging Asia and the stance of policy adopted in central, eastern and southern Europe and in Latin America. Central banks across Asia have been willing to be aggressive in cutting interest rates and reserve requirements in an effort to boost domestic demand, while in other regions the central banks have been more reluctant to ease.
Dependence on External Financing. Latin America and central, eastern and southern Europe remain highly dependent on external financing. In many European countries high net external borrowing requirements, which are typically funded by commercial banks, are now under pressure or severe and rapid contraction. By contrast, Asia’s high domestic saving rate and lack of dependence on external financing, typically serves it well at times of stress.
The fall in the oil price. Even after a modest rebound in 2009, oil prices are forecast to average about $55 per barrel in 2009 compared to $98 in 2008. Among emerging markets, the main losers from this shift are the Gulf oil exporting countries, Russia and, to a lesser extent, Latin America. Emerging Asia (including China) is the major beneficiary. In most of the net consuming nations, the benefits from lower oil prices will accrue either to local refining companies or to governments, and they will offset some of huge losses run up through 2008, as oil products were sold locally at subsidized prices.