The true effect of the current financial crisis’ impact on world economies has been revealing itself in the later half of 2008. Economies around the world have been forced to quickly implement extensive strategies to tackle the deterioration in both the global and domestic economy. The United States’ strategies may have been implemented to avert world economic meltdown, having pumped almost $2 trillion into the global market place, but conversely the highly internal policies implemented by emerging economies seem to have had a greater impact on world markets. The fear of falling demand for commodities in China has fuelled an 80% drop in oil prices over the four months to November, while the two US bailout plans stabilised the equity market at a lower threshold.
Here is a brief account of some of the most influential economic powers written by Phillip Butler, currently on placement at the Bank of England, and contributed to by Christian Esposito and Bhavin Dhanani, currently on placement at Goldman Sachs and Morgan Stanley respectively.
The questions we are asking are;
· Which economies will suffer the greatest economic impact?
· Which economies are likely to be dragged into the longest deepest recession?
· Which economies will suffer the greatest economic impact?
· Which economies are likely to be dragged into the longest deepest recession?
UK
With the Bank rate at the lowest level for 50 years, unemployment and debt rising, technical recession all but official and a stalling housing market is the fiscal stimulus package announced in November enough to stop the UK entering a long deep recession?
Strictly BIF view: A Recession that will certainly compete with the 90’s and 80’s, all dependant on the success of the fiscal package and the credit stream made available.
US
Job losses have breached the 1990’s recession lows and are inevitably going to sink past the trough of the mid 70’s. Bank rates calamitously close to the dreaded 0% and the country has a budget deficit of over $400bn with predictions suggesting it will breach $1000bn in 2009 after the full implementation of its TARP and TALF initiatives.
Strictly BIF view: More likely to see a deep painful Recession than a long drawn out depression.
Euro Area
Already in recession and consumer confidence appearing to be the weakest since the formation of the Economic area, but bank rates seemingly well placed for more manoeuvre in the short term will the Euro area avoid the worst?
Strictly BIF view: Recession but eastern economies may help the Euro Area to a quick recovery.
France
After releasing a €26bn fiscal stimulus package to alleviate fears of a sharp downturn in the economy experienced an economic unicorn of third quarter. Unemployment however stands at 8.2%, 0.5% above the euro zone rate, and this is set to get worse as France’s manufacturing sector begins to feel the brunt of slowing consumer spending. France has some good news though the country is set to leap frog the UK in terms of economic size due to our speed of economic decline and the weaker pound.
Strictly BIF view: Long recession fuelled mainly by its proximity to other floundering European countries.
Germany
Output in the Euro area’s largest economy fell by twice that of the euro zone average for October at 2.1%, signalling the usually robust economy will suffer a third straight quarterly retraction at a forecasted rate of -1.5%. This contraction rate is the largest since the country’s reunification in 1990, there is yet to be any substantial fiscal stimulus offered due to policy maker concerns at throwing money at the impending recession.
Strictly BIF view: Long deep Recession of which only the UK and Spain can compare.
Spain
It is hard to extract anything but negative news from the Spanish economy which is set to enter recession for the first time in 15 years. The country’s unemployed number is increasing rapidly, the housing market is collapsing due to an increase in supply and PMI data is showing 28.2, especially bad when economic growth starts at 50.0.
Strictly BIF view: Long Recession set to last into 2010
Italy
If it was not for one single quarter of positive growth in Q1 of 2008 then Italy would already have had a full year of retraction. However this is not a surprise as Italy has been in recession four times in the last ten years. A lack of control over monetary policy and not being a European super power could spell trouble for the one of the world’s most Jekyll and Hyde economies?
Strictly BIF view: Recession guaranteed for 2009, but will it make a quick recovery for 2010 amid fears of catastrophic inflation.
Japan
Interest rates are anchored at their historic lows, they have not passed 1% since 1995. The economy is technically in a recession and revised Q3 GDP figures show a worsening in the economy. Fears have increased that the 2nd largest world economy could be facing the longest contraction ever. This is primarily fuelled by the fact that Japan has not fully recovered from the last banking crisis.
Strictly BIF view: Pro-Longed Shallow Recession.
China
Industrial output has fallen to 5% the lowest level since the Asian Crisis, exports have fallen nearly 20% since October and GDP growth is projected to fall by as much as a third. Will the rigorous interest rate cuts, 4 trillion Yuan stimulus package and a desire to keep growth above 8% be enough for the economy which could save the world from a 1930’s style recession?
Strictly BIF view: Little chance of recession unless the Chinese economy implodes from reverse migration and a collapse of world demand, worst case scenario would suggest 5% growth for 2009.
Russia
With natural resource prices falling following the lack of global demand, the Russian economy is being hit hard. Construction output data shows that yearly growth has halved indicating that Russia could be the hardest hit out of the so-called BRIC’s. Standard and Poor’s seems to agree with this hypothesis it has downgraded Russia to just two places above Junk.
Strictly BIF view: Flirting with recession, but growth of 2-3% should be realistic, however this is half the GDP growth of the current decade.
India
Expected GDP growth of 6.8% for 2008 and yet India needs to prepare further for second wave of tightening in the economy. With interest rates cut by 100bps to 6.50% and a 280trillion rupee injection planned it is hard to believe the Indian economy will stutter in 2009. Contrary to this, is this the time for the economy which is less reliant on foreign demand to outpace its BRIC cousin China?
Strictly BIF view: Markedly slower growth but will lie between 3-5%
Brazil
Boosted by the higher than expected 1.2% Q3 GDP growth, the Latin America economy is on course to achieve above 5% growth for 2008. However with interest rates at 13.75% and the financial crisis spreading to the tenth largest economy the unemployment figures are set to increase as businesses retreat.
Strictly BIF view: Growth will slow, but with Interest rates in their favour recession should be a long way off.
