Global economic outlook 

From the first murmurings of unrest and concern about the US sub-prime mortgage market, little more than a year ago, the ripples have swept across the globe, rapidly developing into a tidal wave of financial stress, market contraction and business failure. In November 2007, the IMF’s chief economist was warning of a ‘perfect storm’ and almost all of the predictions he made have proven to be accurate.

Throughout 2008, the world economy has decelerated with the speed of change in global financial and commercial markets being a key factor in undermining growth forecasts in the USA, Europe and Asia Pacific regions. Virtually every economy is now on the brink of an expected long and hard recession as credit lines tighten, GDP declines, insolvencies escalate and unemployment soars. 

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Falling GDP and tighter credit

With 75% of GDP figures now available for 2008, it is clear that economic activity has slowed across all major regions compared to 2007, with some markets, notably Spain and the UK, experiencing a severe and rapid downturn. Since September, conditions have deteriorated further, prompting the downward revision of already pessimistic forecasts. By September, forecasts for US growth in 2009 were revised to 1.4% and then zero% a month later, resulting in a drop of 2.7% since January.  This is typical of the downward trend being experienced by all major markets, each showing a dramatic decline in real GDP growth expectations for 2009, ranging from 0.2% for the Netherlands, down to -0.9% for the UK.

Bank lending surveys show that the corporate sector is facing increasingly tight credit conditions, a situation exacerbated following the recent financial institution failures including the highly visible collapse of Lehman Brothers. The demise of the Icelandic banking sector also highlighted vulnerabilities in other banking systems, particularly in Eastern European and CIS countries.

The inability of business to raise additional funds, the increased burden of servicing existing debts and the hardening of credit risk perceptions not only add pressure on lending rates, but also increase the risk of insolvency, which is already showing a sharp increase and looks set to continue throughout 2009.

Revenues under pressure

Revenues are also under increasing pressure as sales to export markets contract, due to the global recession and households restricted spending in the face of an increasingly uncertain future. US house prices are still falling after 8 quarters of steady decline, with similar patterns emerging in Europe.  Prices are reducing in the UK, Ireland and Denmark and deceleration is expected across most European markets during 2009.

Consumer disposable income is still strained by the rise in the cost of essentials such as food and energy experienced earlier in 2008 although the recent drop in prices is also mirrored by falling consumer confidence and income expectations. This restricts consumption further and threatens business revenues which lead to unemployment as firms adjust their cost base to counter reduced demands.  A sharp upturn in unemployment is already a feature of the US and most major European economies and is forecast to continue throughout 2009.

Insolvency rise set to continue

Insolvency levels are also predicted to rise dramatically during 2009 and it is anticipated that US insolvencies will break the 40,000 mark by the end of 2008, bringing the insolvency rate above 0.5% for the first time in 3 years.  Further deterioration in credit quality is likely to drive insolvency levels higher in 2009 as rating agency downgrades outstrip upgrades by 2 to1 in the US and Western Europe.

Negative expectations dominate at present, as pessimistic consumer expectations of their financial position and spending plans reflect similar views held by business. Unprecedented financial sector bail outs, interest rate reductions and other interventions by international governments have been implemented with the intention of helping reduce the impact of the poor economic climate within their respective countries and bolster confidence in trade.  However, it’s too early to gauge the impact of these initiatives and to date they have shown little sign of softening the stark forecasts from most analysts.