Global outlook
| USA - The worst is over Read more » |
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| UK - Through the worst? Read more » |
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| Eurozone - Gradual road to recovery Read more » |
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| Overview of the BRIC countries: Brazil - A shallow recession? Read more » |
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| Russia - Dragged into the mire Read more » |
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| India - Weathering the storm Read more » |
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| China - Recession avoided? Read more » |
Experian’s Global Futures Service provides forecasts, analysis and expert commentary to help organisations understand the economic, financial and business climate in over 40 countries across Europe, Asia, Latin America and North America.
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USA - The worst is over
‘The US economy is in a deep recession. The consumer sector contracted sharply in the third and fourth quarters of 2008 and business investment was hit hard by the post-Lehmann environment.’
‘The economy should emerge from recession in the second half of 2009, with fiscal policy finally matching monetary policy in terms of stimulating growth. Bank recapitalisation and stress tests should also help. The worst has been avoided, but that does not mean things will go back to normal anytime soon.’
Worst recession since 1946, but glimmers of hope on the horizon
- The bottom fell out of the economy in the fourth quarter of 2008 and the first quarter of 2009, with activity contracting by 3% over the period. All sectors, save government, saw activity plummet. That said, consumers surprised in the first quarter of 2009 by increasing spending modestly, especially on durable goods. Expected tax rebates and other government stimulus measures probably played a major role.
- Investment has been particularly hard hit by the freezing up of credit markets in the wake of Lehman Brothers’ collapse. Business investment contracted by nearly 17% over the two-quarter period. Housing’s woes are well known, with residential construction activity having shrunk for 13 consecutive quarters, but the pace of decline picked up in the fourth quarter of 2008 and the first quarter of 2009.
- But bright spots have started emerging since the first quarter of 2009. The US housing market – in some ways the immediate root cause of the ongoing global recession – has shown signs of bottoming out, with prices stabilising or rising in key markets recently as have new home sales, building permits and starts. That said, activity still remains well below year-ago levels.
- Other surveys of business and consumers have likewise started improving. The rapid inventory adjustment -- drawing down stocks accounted for two-fifths of the contraction in the economy in the first quarter of 2009 – means that manufacturing activity is likely to continue improving in the short term. The thawing on financial markets points to a possible pick up in investment by year end.
- The Federal Reserve has pulled out all of the stops in an effort to stave off the worst economic downturn since the Great Depression. In its latest move, the Fed has embarked on a policy of quantitative easing. It is now joined in its efforts by the new Obama administration, which has pushed a massive stimulus package through Congress.
Key risks
- Risks remain largely on the downside given the ongoing deleveraging in both the financial and consumer sectors. The US consumer has been buffeted by plummeting wealth and job losses. The top financial institutions may have been put on firmer footing, but sector remains in a perilous state. It seems likely that a second-round of trouble is in store for the real economy.
- The UK economy has contracted by 4.5% so far in this recession, however the 1.9% decline in the first quarter of 2009 should prove the severest part of the cycle, with the pace of contraction set to ease markedly over the rest of this year. There has been a notable improvement in some indicators, which supports our baseline projection that the worst phase is over. Furthermore, subject to how the stock cycle plays out, a rise in activity in one of the forthcoming quarters is even possible (not yet our baseline view), but is unlikely to prove lasting as long as final demand is weak.
- We remain cautious – the recession is not yet over. Rising unemployment and further house price declines will weigh on consumer spending, investment is set to remain subdued in the face of ongoing lending constraints and concerns over the economic outlook and exports markets remain lacklustre. Given this, real GDP is projected to continue to decline, albeit only modestly, in the second half of 2009. Only a mild upturn is expected in 2010.
- However, the rest of 2009 will be tough, with real GDP contracting by almost 4% in the year as whole, the sharpest fall since 1946. Only a mild upturn is expected in 2010.
- In 2011, the economic revival is expected to gather pace, but medium-term prospects are for annual average growth of 2%, well below the long-term average.
- The Bank of England has cut rates to 0.5% in an attempt to limit the recession’s depth. There is little scope for further cuts and quantitative easing is now the main tool of monetary policy.
- The risks surrounding our baseline view have become more balanced in line with recent evidence showing an improvement in confidence and activity. The main upside risk to our forecast is the possibility that the economy may revive sooner, and more sharply, than projected as the stimulus measures provide an unexpectedly strong boost. The key downside risk is that recent upturn in key indicators fades abruptly, leading to a more protracted recession.
- Household imbalances, less support from employment income and housing wealth, the need to restore viability to government finances and a troubled financial sector all threaten to limit UK medium-term growth prospects.
- Buffeted by major shocks in credit, trade and prices the eurozone economy is certain to suffer the worst recession since WWII. A deep contraction in 2009 already is in the bag, while recent ‘green shoots’ support our central forecast of a recovery towards the end of the year, leading to positive if weak growth in 2010. Further out, the recovery will gather momentum, aided by monetary and fiscal stimuli, low prices, as well as a renaissance in China and the US.
- The economy has contracted for five quarters but negative momentum intensified with an unparalleled quarterly contraction of 2.5% in the first quarter of 2009. For export-oriented countries such as Germany the retrenchments had been particularly bad. However, most high frequency data have stabilised recently and even though continuing to point towards recession, at least show diminishing negative momentum. As result a formal end to the recession at the end of the year now looks more likely.
- There will be country heterogeneity, though all countries will sustain a deep recession, particularly exporting nations. Some economies in the west and south that are exposed to country-specific imbalances, chiefly housing market adjustments and high debt levels, are susceptible to a protracted ‘L-shaped’ downturn following unsustainable spending sprees. Export-oriented economies, especially Germany, will have to rebalance their economies because otherwise they will struggle.
- Inflation prospects have changed drastically in the last few months. Inflation tumbled from 4% in July last year, twice the ECB’s target, to 0.6% currently. We expect inflation to average 0.4% this year and then bounce back to reach 1.4% and 1.8% in 2010 and 2011. The ECB has slashed interest rates to 1%. The current level is deemed ‘appropriate’ and further cuts are less likely, while the ECB is shifting its focus towards unorthodox measures such as quantitative easing. Tightening will wait until the economy is on a firmer footing in 2010.
- Renewed volatility in markets, coupled with another collapse in trade and consumer distress due to widespread job losses would imply a downturn that lingers into 2010 and beyond. In the event deflation could become a real problem. Many European countries still haven’t fully resolved the issue of troubled assets. If unresolved this could trigger further problems in terms of access to credit; while Eastern European credit binging might also pose additional challenges.
- On the upside, the fiscal and monetary stimuli might be more effective than currently envisaged and confidence return sooner. Temporary measures tabled by government might have also been instrumental in limiting the fallout for labour markets; while an earlier recovery in China and the US would aid exports.
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Real GDP grew by over 5% in 2008 but weakened significantly in the last quarter. Early data from 2009 indicate that a recession is most likely underway. We forecast a 1.3% fall in GDP in 2009.
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As the world is entering recession the Mercosur region is following. This has resulted in an increasingly weak external sector for Brazil which will be exacerbated towards the middle of 2009. As a result of lower business confidence and unemployment taking hold, domestic demand is expected to contract during the first half of 2009.
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As inflation heads down the central bank cut its SELIC target rate by 450 basis points so far in 2009, to 9.25% in June. The Monetary Policy Committee (Copom) is expected to slow the pace of cuts going forward, with the SELIC target rate falling to 9% by the end of the year and 8.5% by end-2010.
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As government resources run out the recovery will come slowly in 2010 with a decreasing role for fiscal stimulus and a more significant one for the private sector. Throughout 2009 government action will focus more in providing support and easier access to credit for key industries. We forecast 2.7% GDP growth in 2010 and a full recovery in 2011.
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Strong import demand coupled with a strong real in 2008 resulted in a reversal of Brazil’s external position. As the real depreciates the current account balance will improve slightly. In the long term, export growth should rise above the 6% mark, aided by Brazil’s more central role in the world market for energy.
- Fiscal action fails to alleviate financing difficulties and stimulate the domestic economy resulting in a worse than forecast contraction in private expenditure and worsening employment prospects.
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Structural features such as worsening demographics, tax burden, poor infrastructure and low levels of educational attainment among its workforce pose downward risks to the long-term growth forecast.
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An export slump, compounded by the oil price drop in the second half of 2008, has dragged the Russian economy into recession after a decade of high-speed expansion. The recovery, dependent on inward investment, further appreciation of the oil price and some deficit state spending, will start at the end of this year but will be disappointingly slow.
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Russia’s new middle class, borne of the energy-export drive, will raise savings rates in response to the threatening environment. A sharp decline in household spending over the next few quarters is very likely, with technological and durable product sectors most affected. Many Russian consumers will have been reminded of the1998 financial crisis.
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The government’s anti-crisis package involves running down the Reserve Fund to finance some hefty fiscal deficits over the next few years. By current spending projections, the state will scale up its gilt sales from the third quarter of 2010. The state is also increasing its influence in the private sector through its foreign debt subsidies and banking system bail-outs.
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The momentum in private sector job creation has disappeared and unemployment will continue to increase over the next year, even though this will not be fully reflected in the official data. The threatening economic environment is encouraging more people to join the workforce. Wage inflation will fall in real terms over the next two years.
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The Central Bank of Russia (CBR) cut interest rates in June this year to 11.5%, down from 13% in April, signalling its intended policy shift away from supporting the rouble and toward supporting domestic demand. We expect that monetary policy will be used increasingly to stabilise consumer and investment markets over the next two years.
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Without this CBR support, rouble volatility will continue to undermine business and consumer confidence. The rouble is expected to strengthen into the medium term, especially from 2011 when the economic recovery becomes more convincing
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The recession would be prolonged into 2010 if the oil price were to dip under $50 per barrel again.
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Investors may be deterred by the government’s expanding influence in the private sector, especially as there is little in the government’s current rhetoric and behaviour to suggest a withdrawal.
- The economy expanded in real terms by 9.1% in fiscal year 2007/08, marking the fourth year of exceptionally strong growth. Even so, the economy was slowing before the global recession. This has accelerated since mid-2008, with annual growth falling to 4.8% in CY2008q4 and 4.1% in CY2009q1.
- After showing resilience, household spending has finally been hit by the global downturn. Inflation remains high and has eroded consumers’ buying-power. The sharp fall in equities prices in CY2008 has dented sentiment, particularly among wealthier households. Even with the Reserve Bank of India slashing rates, it seems likely that household spending will slow further in coming quarters.
- Real GDP growth is projected to slow from 9.1% in fiscal year 2007/08 to 6.1% in 2008/09 and 4.2% in 2009/10. The economy has been losing pace since the beginning of 2007 and will continue to slow as the global recession hits exports and curbs domestic demand.
- Though the economy is expected to slow going forward, the longer-term picture remains very positive. There are a number of factors supportive of growth. Catch-up potential for the economy in a period of rapid globalisation is particularly strong, given the underdeveloped trade sector, alongside low income levels and labour costs. India’s competitive edge in tradable services will remain strong
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Upside risks are starting to appear for the first time in months. With the stockmarket and rupee rallying recently, India’s high-spending workers in business services and information and communications technology are likely to feel emboldened. But these sectors will still take a hit from the global recession, with wage rises and employment growth slowing significantly.
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The economy slowed sharply in 2008q4, with annual real GDP growth falling to just over 5%, a record low for the decade. It also implies that the economy essentially came to a halt. Manufacturing has taken the brunt of the global recession, with exports collapsing. Growth accelerated slightly in the first quarter of 2009, to 6.1%, giving hope that the worst may be over.
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It seems that China’s consumers finally may be raising their game. Retail sales have continued to boom, albeit at a slower pace. Even when deflated by price rises – or price falls more recently – sales in real terms continue to grow at annual rate of 17%. If sustained, this would be a positive development, raising hopes that the rebalancing of China’s economy away from over-dependency on exports may have begun.
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The stimulus package should be enough to underpin real GDP growth of 6.5% for 2009. Consumer demand remains strong. Those labourers losing their jobs are largely the rural poor, who are returning to their homes in droves. Retail sales continue to boom and looser lending standards should help to mitigate the impact on consumer demand from exporters’ woes.
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The consumer sector should eventually take over from investment as the driver of growth. But such a rebalancing is likely to be gradual, particularly given investment’s substantial share of output. Investment is also the main way the government is attempting to stimulate the economy, with bank lending in the first three months of 2009 already exceeding the 2008 total.
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Demographics will start to exert a slowing impact on economic growth in the longer term. The growth in the population of working age is already starting to slow, as the government’s one-child policy starts to have a negative impact. The working-age population will begin shrinking some time toward the middle of the next decade
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With prospects worsening in China’s main export markets, the risk is significant that growth in China could well undershoot what is necessary to stave off social unrest stemming from rising unemployment. How the authorities respond will be key not just to the recovery but also for long-term prospects.
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With loss-making enterprises on the rise, there will be questions about the health of China’s banking sector. Its exposure to nonperforming loans is likely higher than the authorities admit, especially with property and equities markets.
Matthew Sherwood
Senior Global Economic Adviser
UK - Through the worst?
‘The UK economy is in a severe downturn and our forecast is for the rest of 2009 to see further contraction, though less steep than in the last nine months. We expect GDP to shrink by close to 4% this year, the worst outturn since 1946. Recovery will begin in 2010, but will be patchy and mild.’
‘The central scenario is bleak, but even so there are serious downside risks. However, there some upside risks – notably that the fiscal and monetary boosts succeed in reviving growth both domestically and globally sooner than expected.’
A deep recession, but we may be halfway through the downswing
Key risks
Sunita Bali
Senior UK Economist
Eurozone - Gradual road to recovery
‘The eurozone suffered its worst contraction on record in the first quarter of 2009 and looks set to sustain its deepest recession yet. But signs are emerging that the worst may be over and that by the end of the year the recession will have played out. While some weakness will persist into 2010, momentum will gradually build and drive the recovery.’ ‘Renewed volatility in markets, coupled with another collapse in trade and consumer distress due to widespread job losses would imply a downturn that lingers in 2010 and beyond.’
Deepest recession since WWII followed by gradual recovery
Key risks
Dylan Schumacher
Senior European Economist
Overview of the Bric countries
Brazil - A shallow recession?
‘Early indications point to a sharp contraction in the first quarter of 2009. Industrial production and external demand have fallen by amounts not seen since the 1998 crisis.’ ‘The recession should progress through 2009 easing towards the end of the year as the world economy resumes growth and the monetary authorities help with big interest rate cuts.’
As inflation worries leave the agenda, a weakening domestic sector faces some familiar problems. Job losses are expected in the short term with consumer trends falling back for the first time in four years.
Recession is unavoidable
Key risks
Sebastian de-Ramon
Managing Consultant
Russia - Dragged into the mire
‘The recovery, dependent on inward investment, further appreciation of the oil price and some deficit state spending, will start at the end of this year but will be disappointingly slow.’
‘The recession would be prolonged into 2010 if the oil price were to dip under $50 per barrel again.’
Recession is hitting the new middle class hard
Key risks
Matthew Sherwood
Senior Global Economic Adviser
India - Weathering the storm
‘The Reserve Bank has slashed rates, despite inflation that remains stubbornly high. But policy action seems to have the desired effect, at least in terms of the banking sector.’ ‘
The slowdown is still likely to gather pace as India’s consumers are no longer immune to the global recession. That said, India’s outlook is one of the best in the world. And for the first time in a long while upside risks are worth considering.’
Growth rates soften – but economy remains robust
Key risks
Matthew Sherwood
Senior Global Economic Adviser
China - Recession avoided?
‘With the collapse of global trade it was feared that even high-flying China might fall into recession. But the government has ample resources at its disposal, using its control of the banks to promote lending, in addition to a Rmb4trn stimulus package.’
‘While growth should be sustained in the short term, there are questions about the long-term efficacy of the government’s efforts. If not managed well, massive investment spending would be wasted, and could even create new asset bubbles.’
Economic bust, but hopes that consumers will raise their game
Key risks
Matthew Sherwood
Senior Global Economic Adviser