America could see Gross Domestic Product (GDP) growth contract by 1.5 per cent, while growth in the big developing economies could slip to the lowest levels in many years. The following graph shows the Real GDP forecast for the year 2009.
It is now quite obvious that the international economy is into a downturn, because it is likely to hit the US, Japan, and the larger European Union countries simultaneously. The IMF reckons that there are 25 per cent chances of the world economy growing by less than three per cent in 2008 and 2009, the equivalent of recession, in its view.
The origins of this crisis lie in the biggest asset bubble in history; financial markets have already suffered arguably their biggest shock for 80 years; and America suffering (Britain’s housing market, for instance, is showing the same symptoms as America’s). But so far there is little evidence that the world economy is falling off a cliff.
US economy was the first to see the slowdown. Evidence is mounting that the economy has slipped into recession and this time consumer weakness is to the fore. The doughty American shopper is being put back by four things: the housing bust, the credit crunch, higher fuel and food costs and, most recently, a weakening labour market.
The unemployment rate rose to over 5 per cent in March 2008, while the private sector lost jobs for the fourth month in a row. The IMF had officially predicted an American recession in 2008.
As per the predictions of the US Fed Reserve also, the US economy will grow only 1.3 to two per cent in 2008. In November 2007, the Fed had forecast that the economy will grow by about 1.8 to 2.2 per cent and unemployment rate will remain at 4.8 per cent.
The new forecast is significantly lower than this, including the unemployment rate which is at 5.3 per cent. The consumer spending in the US in decreasing.
This is very important considering the fact that it accounts for nearly 70 per cent of the economic activity of the US and more than 20 per cent of global GDP. The housing output has fallen by 24 per cent in the fourth quarter contributing to sharp decline in construction employment.
The rate of job losses in America has been mild compared with previous downturns, and there are many reasons to suppose it will stay that way.
(1) The first is the activism of American policy-markers. Congress started throwing money at the problem early, and after announcing a grand fiscal stimulus package, a second fiscal stimulus is already being discussed alongside a bail-out for the housing market.
(2) The Fed has already lowered interest rates and promised more cuts if the economy stays weak and perhaps most important, sharply reduced the odds of financial-market catastrophe by extending its safety net to investment banks.
(3) Another reason is the changing structure of the world economy. The dynamism and resilience of emerging markets mean that America does not matter as much as it once did.
The Indian economy is said to be decoupled from the US economy. The IMF expected global growth to fall from 4.9 per cent in 2007 to 3.7 per cent in 2008 but the Indian GDP growth was maintained above 8 per cent in 2007-08 and is predicted to remain around 8 per cent during 2008-09.
US-European trade constitutes 40 per cent of the world’s total and supports 14 million jobs. Therefore, the crisis in the US has repercussions on growth in the Euro zone. The IMF in its recent semi-annual World Economic Outlook report said that Europe will see sluggish growth in coming years because of the recession in the United States, a strong Euro and ongoing turmoil in financial markets.
Growth in the Euro area will slow to 1.4 per cent for current year and will fall further to 1.2 per cent in 2009. That compares to a growth rate of 2.6 per cent in 2007. As per the report, the downturn in significant enough that it should trigger a relaxing of monetary policy by the ECB. Consumer prices were forecast to rise 2.8 per cent in the Euro area this year but only 1.6 per cent in 2009.
Germany will face one of the largest slowdowns of any European nation, with GDP growth dropping to 1.4 per cent during 2008 and one per cent in 2009, compared to growth of 2.5 per cent in 2007.
Charles Collyns, the IMF’s lead economist for Western Europe, said domestic demand in Germany has so far not been able to pick up for the country’s heavy dependency on external factors. Outside of the US, Europe has been hardest hit for a financial crisis that has led to more than US $ 200 billion in write downs at investment banks tied to a meltdown in the US subprime mortgage market.
Asian economies though feeling the heat of slowdown in US economy are quite resilient. Though there is slowdown in their GDP growth, it is only a marginal reduction from the high levels.
In February, World Bank revised its forecast for China’s 2008 GDP growth to 9.6 per cent which is 1.2 per cent lower than the earlier estimate. The bank said that the country is in a strong macroeconomic position to stimulate demand by easing fiscal policy and credit controls, even if the global slowdown will be more pronounced.
As far as India is concerned, consensus GDP growth estimates have been lowered to around eight per cent, against 8.7 per cent in 2007-08. However, manufacturing production rose 8.6 per cent in February 2008 from a year earlier, compared with January’s revised 6.3 per cent.
Though curbing the rising inflation is priority of the government of India, it has taken definitive steps to keep the growth going. To encourage employment, the trade policy supplement paid special attention to labour-intensive export industries.
For example, it gave a five per cent additional duty credit and carved out separate allocations under existing market-promotion funds for the export of toys and sports goods. Government would set up a joint task force with members from the central and state governments as well as industry to draw up a road map for removing structural hurdles to exports.
The task force will study the issues such as reducing waiting periods at ports and airports, developing world-class infrastructure, and setting up global manufacturing hubs for auto parts, drugs, jewellery, handicrafts, textiles, petroleum products and so on.
Economists continue to argue about whether or not emerging economies will follow America into recession. Recent data suggest that decoupling is no myth. Indeed, it may yet save the world economy. Decoupling does not mean that an American recession will have no impact on developing countries.
Such countries have become more integrated into the world economy as their exports have increased from just over 25 per cent of their GDP in 1990 to almost 50 per cent today. Sales to America will obviously weaken. The point is that their GDP-growth rates will slow by much less than in previous American downturns.
One of the reasons is that while exports to America have stumbled, those to other emerging economies have surged. China’s growth in exports to America slowed to only five per cent (in dollar terms) in the year up to January, but exports to Brazil, India and Russia were up by more than 60 per cent.
Half of China’s exports now go to other emerging economies. Likewise, South Korea’s exports to the US tumbled by 20 per cent in the year up to February, but its total exports rose by 20 per cent, due to trade with other developing nations. A second supporting factor is that in many emerging markets domestic consumption and investment quickened during 2007.
Their consumer spending rose almost thrice as fast as in the developed world. Investment seems to be holding up even better. According to HSBC, real capital spending rose by a staggering 17 per cent in emerging economies last year, compared with only 1.2 per cent in rich economies. The four biggest emerging economies, which accounted for two-fifths
of global GDP growth last year, are the least dependent on the United States: exports to America account for just eight per cent of China’s GDP, four per cent of India’s, three per cent of Brazil’s and one per cent of Russia’s. Over 95 per cent of China’s growth of 11.2 per cent in the year to the fourth quarter came from domestic demand.
Smaller economies in Asia seem more vulnerable. For example, Malaysia exports to America amount to 22 per cent of its GDP, and they fell by 18 per cent in the year up to December. Yet its annual GDP growth jumped to 7.3 per cent in the fourth quarter, thanks to consumer spending and a jump in government infrastructure investment.
As the world appears to be heading towards a global recession the need for open trade is as paramount as ever.
To stop would be to forego huge benefits; to go backward toward greater protectionism, as some urge, would be to risk falling into the kind to trade wars that deepened the calamity of the Great Depression.
We should remember that given the scale of the financial mess, situation could be a lot worse. On can even argue that after five years of breakneck growth, a more sedate global expansion would be no bad thing: it would dampen inflationary pressures in the emerging world and weaker domestic demand should shrink America’s gaping external deficit already down from above six per cent of GDP to below five per cent. The recession may not be as severe as many fear, but the recovery could take longer.
Signs of Revival of Global Economy
Global economic slowdown is showing signs of bottoming, suggesting that revival is not far. Consumer confidence is stabilizing after falling for a year now, providing a glimmer of hope for the deteriorating world economy.
Clifford Young of Ipsos Global Public Affairs the international market research and polling company that carried an online poll in May 2008 said, “It looks like we have hit bottom and so there are glimmers of hope.
What we are seeing is that consumers for the most part have been scared, and they have cut expenditures and increased savings. Ipsos polled people in a number of countries like the US, Canada, Mexico, Brazil, Argentina, South Korea, China, Japan, India, Australia, Germany, Russia, Poland, Czech Republic, Hungary, Turkey, Sweden, Italy, England, France, Spain and the Netherlands.
Young said that the stabilization is basically happening in the United States, India and China while Europe is still dicey, as are Brazil and Russia. The 23 countries polled make up 75 per cent of world’s Gross Domestic Product.
A broad US recovery in 2010 will be followed by a slower global rebound in 2011 or later, according to approximately half of the 300 CEOs surveyed in the newly released fifth annual New York Stock Exchange (NYSE) Euronext CEO Report, entitled ‘The Road to Recovery” conducted by Opinion Research Corporation (ORC).
A large majority of CEOs favour business tax reliefs, low interest rates and liberal lending to boost the economic activity. Many of them also agree on the need to restructure America’s financial regulatory system, streamline corporate governance and align the US and international accounting standards.
The report reveals how CEOs have been forced to analyse their past habits and “significantly change the way they operate today and plan for tomorrow.” However, the US CEOs and their counterparts in other countries have different views on government interventions, though they generally agree on the need to be innovative yet disciplined to successfully emerge from the economic crisis.
Duncan Viederaur, CEO, NYSE Euro next stated that global CEOs were responsibly addressing the challenges brought by the financial meltdown and were employing genuine operational discipline and planning for the future.
He went on to say that they were focused on maintaining a strong balance sheet and on corporate competitiveness, and were identifying new growth opportunities as well as ways to build value for stakeholders.
In spite of the downturn, most of the CEOs acknowledged that their companies have gained some benefit from the crisis in terms of larger market share, contract renegotiations and hiring of new employee talent.
When asked what change they would make to help their companies through future market turmoil, they replied almost in unison that it would be controlling costs and debt and remaining highly liquid. Securing finance topped the list as the internal factor having a greater influence on revenue growth through 2010, with the strength of the management team coming a close second.
Amid reports that retail spending is picking up and the world economy may be stablising, American families say that they are looking beyond the eventual recovery to a more frugal future that is based on saving money as a desirable and permanent financial strategy.
The First Command Financial Behaviors Index indicated that the majority of respondents were embracing a more conservative philosophy in their personal finances. About 75 per cent of respondents said that the US was too wasteful before the recession.
More than half agree that the economic situation will continue to be bad for some time to come and it will have a long-term effect on their behaviour. They also said that they felt more confident, assured and tension free after developing a disciplined saving mentality.
Scott Spiker, CEO of First Command Financial Services Inc. had this to say: “After years of living in a consumption fueled economy, consumers are rediscovering the time-tested values of prudence and self-reliance. This change signals a slower but healthier recovery.”
“What we don’t need,” Spiker went on to say, “are encouragements from government or Wall Street to spend more and more. Rather, the time has come for Americans to embrace a new frugality.”
This new attitude is emerging at a time when the US outlook on personal finance is improving. About one-third of respondents to the survey indicated that their personal financial situation was stable. Many of them said they were cutting down expenditure though they didn’t need to.
Only 34 per cent said they were looking forward to the economy bouncing back so that their spending habits could go back to previous ways. Spiker also pointed out that the savings to debt ratio was the most important contributor to financial optimism.
Simply speaking, with more savings and less debt, the feelings of financial security increase. Having a reasonable savings-to-debt ratio as is now being aspired to in America makes a person feel better about the present and more optimistic about the future.
Now Americans continue to cut back expenditure by reducing leisure activities, postponing clothing purchases, shopping at discount stores and increasing their use of coupons.
Relatively few consumers who have received tax refund say that they will spend it on non-essential items. The average American according to Spiker has regained fiscal sanity and that is an encouraging sign.
Business Confidence Rises in India despite Concerns
According to Confederation of Indian Industry’s-bi-annual Business Outlook Survey (CII-BCI), India Inc’s business confidence has improved considerably for April-September 2009 period compared to the past six months. “CII-BCI was recorded at 58.7 for April-September 2009-10, reflecting an increase after two consecutive periods of decline.
“The rise in the index reflects better expectations for the coming six months and confirms our belief that the worst is likely to be over for the economy,” said Director General, CM, Chandrajit Banerjee. However, uncertain global economic outlook and slackening consumer demand still remain major concerns for the business community.
The CII-BCI is constructed as a weighted average of the Current Situation Index (CSI) and the Expectations Index (El). The CSI that reflects current business conditions has lost 2.5 points for the period April-September 2009-10 as compared with the previous six months.
In comparison with the corresponding period last year, the CSI is down 6.9 points, reflecting a decrease in current business sentiments due to the global financial and economic meltdown.
The El that reflects the expectation of Indian industry with regard to performance of their company, sector and the economy for the period April-September 2009-t0 gained 4.9 Points as compared to the second half of 2008-09.
The CII survey, which is based on a sample size of 374 companies, revealed that 83 per cent of the respondents expect GDP growth for the year 2009-10 to exceed 5 per cent with the majority expecting it to be between 5 and 6 per cent.
On inflation, 86 per cent of the respondents expected inflation to be above 2 per cent in 2009-10, thereby ruling out the possibility of sustained deflation in the economy. Given the ongoing global slowdown, 96 per cent of the respondents feel that it is only in the second half of 2009-.10 and beyond, that the Indian economy would witness a turnaround and begin returning to normal growth.
The prospects for investment, capacity utilization, production, employment and exports as elements that build up the business confidence were also looked into by the survey. The survey revealed that 30 per cent of the respondents planned to increase investments during April-September 2009- 10.
Capacity utilization has improved and 50 per cent of the respondents revealed that capacity utilization for April- September 2009-10 was expected to be in the range of 75- 100 per cent compared to 39 per cent of respondents who said that capacity utilisation was in that range.
The Cll survey revealed that 25 per cent of the respondents expected the inventory levels to increase, lower than the 35 per cent that reported an increase for the past six months.
According to 50 per cent of the respondents, the value of production was expected to increase in the next six months.
Further, increase in production was likely because of expected increase in new orders. Over 5 per cent of the respondents expected new orders to increase in the next six months, compared to about 30 per cent of the respondents who revealed that new orders had increased in the second half of 2008-09.
Over 35 per cent of the respondents expressed confidence in expansion of exports for the period April-September 2009- 10. Regarding procedural delays, 95 per cent of the respondents felt that the delays had not reduced. This has been a long-standing hurdle for exporters, which raises transactions costs and needs to be addressed urgently.
The CII Business Outlook Survey also asked respondents about their main concerns, such as global economic instability, high interest rate, cost and availability of labour, infrastructure and institutional shortages, currency risks, slackening consumer demand, cost of compliance, surge in imports and risk of deflation.
Although financial markets appear to be coming out of a deep freeze, it is early to say the global slowdown has bottomed, said Standard & Poor’s Ratings Services in a report. The report, titled “Fiscal Health of Asian Sovereigns if ‘Green Shoots’ Wither,” is a “what-if scenario analysis, looking at potential evolutions of selected Asian sovereign fiscal performance over the next few years in two scenarios.
One scenario is Standard & Poor’s baseline projections of economic development, in which Asian economies recover sometime in 2010 after steep declines in many of them.
“In this scenario, the negative impact on sovereign credit ratings would be minimal, with the possible exceptions of those currently with a negative outlook Thailand, Vietnam, and India,” said Standard & Poor’s credit analyst, Kim Eng Tan.
The other scenario is an extended recession, in which most of Asia drags through four consecutive years of contraction. Even in this scenario, which we consider to be remote, our simulation indicates that fiscal pressures are not likely to lead to default although sovereign credit quality in many cases would deteriorate markedly, Tan said.
Meanwhile OPEC in its Monthly Oil Market Report 2009 pointed out that the world economy has seen some positive developments recently with the rally in the stock markets, improved confidence and a more positive sentiment. However, volatility remains high and large uncertainties persist as the world economy struggles to emerge from recession.
In 2009, per capita GDP is expected to fall 2.5% compared to an average drop of 0.4% in previous global recessions of 1975, 1982 and 1991, according to International Monetary Fund (IMF).
The result suggest that, unless an investment- grade sovereign makes major policy mistakes, most would remain in that category after an extended-recession scenario, even though their credit ratings could slip by one to four notches. The resilience of these investment-grade sovereigns, with a few exceptions, stems from their relatively strong fiscal positions prior to the crisis.
“These governments have years of fiscal consolidation and debt reduction, a sounder banking sector with higher capitalization and better risk management, and stronger external liquidity enhanced by more flexible exchange rate regimes,” Tan said. S&P report is a part of a global effort to provide greater transparency and insight to market participants through “what-if scenario analysis.
Meanwhile Standard and Poor’s has come up with a new level of innovation for investors looking to gain exposure to the US and Australian markets while limiting their risk. S&P has launched risk controlled versions of its widely followed S&P 500 and S&P/ASX 200 indices.
The S&P 500 Risk Control 10% index and the S&P/ASX 200 Risk Control 15% Index track the return of a strategy which dynamically adjusts the exposure to each underlying index in order to control the level of risk.
The S&P 500 Risk Control 10% index targets a volatility level of 10% and the S&P/ASX 200 Risk Control 15% index targets a volatility level of 15%. If the risk level reaches a threshold that is too high, the exposure to the index is decreased in order to maintain the target volatility.
If the risk level is too low, then the index will employ leverage to maintain the targeted level of volatility. “At a time of heightened volatility in the world’s financial markets, Standard & Poor’s new US and Australian based risk control indices will help investors target and control the level of risk in the S&P 500 and S&P/ASX 200 respectively,” says Steve Goldin, Vice President of Strategy Indices at Standard & Poor’s Index Services.
“With risk controlled indices already based upon the S&P BRIC 40 Index, S&P Latin America 40 Index, S&P South East Asia 40 Index, and S&P Global Infrastructure Index, Standard & Poor’s is the only index provider to offer indices targeting specific volatility levels,” he adds.
Opinions are divided as to when the economic slowdown will come to an end and the world economy will be back on track. But there is a consensus of opinion that some signs of revival are already visible.