Global economic outlook

 

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 in a recession and the key characteristics are the continued decline of world markets and economies, together with significant government financial stimulus packages currently being implemented to head off the worst effects.

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Further downward GDP revisions to come

The latter half of 2008 showed an accelerated decline across all major markets, with 2009 now widely expected to be an exceptionally bad year with all major economies expected to contract. Market conditions have continued to deteriorate underlining the increasingly pessimistic forecasts for GDP.  US growth forecasts stood at zero% in October and is now showing a contraction of -1.8% for 2009.

The US figures are typical of the downward revisions in GDP expectations across all markets in a band ranging from -1.0% in France, to -2.2% for the UK. During 2008, the growth forecasts fell by around 3 to 4% across all markets and as 2009 progresses, it is expected that further downward revisions are likely.

Bank lending surveys show that the credit tightening has been accelerating since the fourth quarter of 2007 and after a year, the cumulative effect is now significant, reflecting the depleted capital positions of financial institutions who are now having difficulty extending new credit.  Also, many businesses are now not regarded as creditworthy, which further inhibits lending activity.

Slump reduces consumption and inflation

Declining consumption, reducing asset values and slower rates of credit growth are fuelling lower consumer price inflation levels.  Sharp reductions in energy prices during the last 6 months of 2008 made a significant contribution to driving inflation down.  The lack of bank funding remains a consistent feature of the global economy as firms continue to struggle with cash flow management and liquidity.

Determined and wide reaching interventions by various governments have yet to filter through and provide tangible benefits to business and consumers, which is not aided by interest rate reductions not being passed on to corporate and household borrowers. House prices remain depressed, giving a clear indication to the depth of the downturn as falling collateral values also affect the ability of households to finance consumption through borrowing.  The house price drop in the US is unrelenting following 27 months of steady decline, which also reflects the continued fall back across several European markets including the UK and Ireland, which are performing particularly badly.

Inevitably consumer confidence has dipped further during the last quarter, which when combined with tight credit conditions, caused further falls in consumption.  These factors combined to add severe pressure on businesses, reducing profits during the fourth quarter of 2008 and stimulating further rounds of job shedding as firms respond to the market conditions.

Insolvencies accelerate as the downturn bites harder

Predictions of accelerating insolvency rates across most major markets are proving correct, particularly for the US and the UK where insolvencies were recorded 11,000 and 4,000 respectively for the last quarter of 2008.  Spain has hit a year on year insolvency rate rise of 250%, with the UK currently at around 50% alongside the Nordic region with Japan, Germany, France all showing increased insolvency rates.

The negative consumer expectations that evolved during 2008 are still present as the pessimistic outlook dominates their perceptions and assessments of financial position and spending plans, which also echo the feelings of business.  It is universally agreed that 2009 will be a particularly difficult year for business, consumers and global trade. Any recovery is not expected to materialise until 2010 and with the possible exception of the US, it is expected to be a very slow process.