Global Economic Outlook 

 

The expert view of Atradius Economists - Q1 2010 
 

Renewed optimism, but recovery will be protracted

For just over two years, the global economy has been in the grip of the most severe and wide ranging recession that most can remember, prompting a contraction in global GDP during 2009 for the first time since the mid 1940s. While most countries are still labouring under the after effects of the downturn, there are now some clear indications that a recovery is underway, yet there are questions about its sustainability as economies begin to emerge from various fiscal stimulus support packages.

By the end of 2007, the key conditions were already in place that triggered the rapid, cumulative and synchronised decline in all major economies and had it not been for extensive state support to the financial sector and domestic consumption, there is little doubt that the contraction would have been even more abrupt. In addition to slowing the decline, it has also enabled the US and major Eurozone economies to return to growth with them both exiting the recession in Q3 of 2009 with GDP figures of 2.8% and 0.4% respectively.

 

Confidence fuels improved GDP forecasts

In recent months there have also been positive signs for industrial production, with the rate of decline slowing. However, the modest rate of improvement coupled to the significant levels of reduction during the recession indicates that it will take some time before pre-crisis output levels of reached again. International trade also contracted by around 12% during the first nine months of 2009; although it picked up during the last quarter, further fuelling confidence in a recovery during 2010, although export growth projections remain modest at 2.5%.

Nevertheless, international opinion seems united, however cautiously, in predicting an economic recovery during 2010 as more positive signals in economic data for sales, production and trade have prompted GDP forecasts to be revised upwards. The US is expected to grow by 2.7% during 2010, outperforming the Eurozone by 1.4%, while Japan is expected to show a 6.8% turnaround from its significant contraction in 2009, recording positive growth of 1.5%. Most major European countries are expecting positive GDP growth of between 0.9% ( France) and 1.7% ( Germany), yet Spain is still anticipating a decline of 0.4% as the trend for 2010 remains negative.

Spain, along with Portugal, Ireland and Greece are now facing some severe economic challenges, which have not only been exposed by the recession but exacerbate by it. Although each has its own specific issues, common factors such as unbalanced economic structures, growing debt burdens, rising wages, reducing productivity and weakened banking sectors are placing immense additional pressure on their respective governments, other Euro currency states and the Eurozone banks.

 

Unemployment stays flat but household confidence shows fragile improvement

While unemployment increases in Spain, Ireland and Portugal have been more aggressive than in other parts of the Eurozone, unemployment has continued to rise during 2009 across all advanced economies with the US hitting levels not experienced since the early 1980s.

Irrespective of this situation, households are moving towards a ‘brighter’ outlook than the pessimistic views present during almost the whole of 2009. While this is a welcome indicator, the improvement only represents a rebound from severely depressed levels and is significantly more subdued than the prevailing views prior to the economic crisis.

 

A varied insolvency picture raises concerns about sustainable recovery

Although the widespread increase in insolvencies during the past 12 months was experienced with differing levels of severity and timing from country to country, the collective impact on the corporate environment was significant. The UK and US were still seeing increases of 50% per annum until the second quarter before showing a slight improvement in the third, while the Netherlands' rate continued to grow, reaching 100% in the same period. Germany’s insolvency levels also showed a slight increase, which might suggest that failures are being impacted as public support is withdrawn.

Alongside the rising number of large-scale defaults, there has been a general deterioration in credit quality in recent quarters, reflected in the actions of rating agencies. Negative rating actions are still outstripping positive ones both in Western Europe and in North America, even if a moderation in the number of downgrades is in evidence since the third quarter. This suggests that financial weakening has taken place and businesses may be less resilient to future distress.

While an improvement in the insolvency environment is anticipated, the levels will remain high and the results will be mixed. For example, while Germany and the Netherlands are expected to continue their deteriorating trends, other countries, such as the UK and the USA, are expected to display a slight reduction in insolvency levels as they climb out of recession.

 

Sustainable growth or second slump as stimulus is withdrawn?

Co-ordinated action by the G-20 nations to introduce fiscal support and other stimulus initiatives has helped arrest the contraction in output and bolster the financial system by helping inject liquidity into cash starved markets.

These measures were always intended to be temporary and an end to the various programmes is already on the horizon as governments’ plan to exit from the initiatives and begin the process of balancing the books. The inevitable fiscal constraints are already beginning to emerge alongside an unclear path for interest rates and credit conditions, which translate into an unusually high level of forecast uncertainty.

Whether the initial sparks of improvement can ignite a sustained recovery without continued stimulus is a key question and one that could present a risk of a further slump.

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