World Economy Review - January 2009

With overall global economic growth slowing to a near standstill this year, 2009 will be the most challenging year for economies across the globe since World War II, according to an International Monetary Fund report released Jan 28.
The IMF, a global economic organization of 185 countries, said economic growth across the world will fall to just 0.5% in 2009 from 3.4% in 2008. Financial markets are expected to remain under stress - despite a cornucopia of credit-easing actions - until investors and consumers gain confidence that policy actions can help improve market conditions.
In advanced countries, including the United States, the euro-zone nations, Japan, Canada and the United Kingdom, gross domestic product is expected to shrink by 2%. IMF said a vicious cycle of plummeting asset values, decreasing household wealth and sinking consumer demand will result in the first contraction of total advanced economies` GDP in the post-World War II era.
Even booming emerging and developing economies are feeling the pains of the global recession. China, India, the Middle East and Brazil will grow a combined 3.25% in 2009, down considerably from 6.25% growth last year. Falling export demand, lower commodity prices and financial constraints will lead to the slowdown.
IMF said the global downturn won`t last too much longer, as 2010 should be much better. An anticipated recovery of the U.S. housing market in late 2009 should help support a recovery in the United States, and coordinated, sweeping financial market stimulus actions will help advanced economies grow 1.1% next year, according to IMF predictions.
For emerging economies, a stronger economic framework developed in recent years will help them avoid the shock of serious, painful declines of past recessions. Developing economies, too, are better prepared to deal with the current recession than in than in years past, though high poverty levels and reliance on commodity exports will still sting throughout the downturn, said the report. To help reverse the economy`s course, several nations around the world with advanced economies have enacted fiscal stimulus plans, which could cost as much as 1.5% of advanced economies` GDP in 2009. The United States is currently considering a plan that would equal roughly 6% of its total economic output. The actions of those countries are expected to increase their debt levels to 7% of their GDP, up from 3.75% in 2008.
But the IMF said stimulus packages may not be enough. Countries around the globe should consider strong and complementary policy actions that help to fix the financial sector meltdown. IMF recommended a massive coordinated effort to buy up troubled assets, a policy that has received much attention in advanced economies but wavering support in recent months.

Economy of The United States

The US economy contracted by an annualized 3.8 per cent in the final quarter of 2008, according to advance estimates released on Jan 30, a much smaller percentage than expected but still its worst performance since 1982. The decline, led by a build-up in inventories – which boosted GDP by 1.3 percentage points – offered little hope for an economic turnaround, since production is likely to continue to slow as companies seek to draw down their stock. The fourth-quarter contraction follows a contraction of 0.5 per cent in the previous quarter.
The decline in growth was broad based, with consumption falling at an annualized rate of 3.5 per cent and sales of motor vehicles, food, and furniture and equipment significantly down, according to figures from the Bureau of Economic Analysis.
Government efforts to boost the economy were less effective than in the third quarter. Fourth-quarter federal government spending boosted growth 0.4 percentage points, compared with 1.1 percentage points the quarter before. U.S. industrial production fell twice as much as forecast in December as companies pulled back to try to weather the global economic slowdown. Auto output fell to the lowest in more than a quarter century. Output at factories, mines and utilities dropped 2 percent, after a revised decline of 1.3 percent in November that was more than double the previously reported decrease, the Federal Reserve said in Washington. Plant use matched the lowest level since 1983. Factories are reducing output and spending as export demand drops and U.S. retail sales endure the longest string of declines in at least 16 years. Industrial production was projected to drop 1 percent, according to the median forecast in a Bloomberg News survey of 77 economists. Estimates of the decline ranged from 0.2 percent to 2.5 percent.
Capacity utilization, or the proportion of plants in use, fell to 73.6 percent, matching the lowest level since April 1983, from 75.2 percent in November. Last month`s plant use rate was 7.4 percentage points below the average level for 1972 to 2007, the Fed said. Economists had forecast plant use would fall to 74.5 percent, according to the Bloomberg survey. Factory output, which accounts for about four-fifths of industrial production, decreased 2.3 percent, led by a 7.2 percent decline in production of autos and parts. Production of consumer durable goods, including autos, furniture and electronics, fell 4.7 percent. Utility production decreased 0.1 percent after rising 1 percent a month earlier. Mining output, which includes oil drilling, dropped 1.6 percent after a 2.2 percent increase.
The U.S. unemployment rate surged to the highest in nearly 16 years last month as a deepening year-long recession forced companies to axe more than half a million jobs, government data showed. The U.S. economy lost an astonishing 1.9 million jobs in the past four months alone, an acceleration in layoffs towards the end of a year that brought the biggest drop in employment in more than a half century. In all of 2008, 2.6 million people lost their jobs, the largest slump in employment since a 2.75 million drop in 1945. The December data pointed to a bleak start for 2009 and increased chances the economic downturn could become the longest since the 1930s.
"This is a very dismal report. This paints a much worse picture in 2008 than we had thought," said Lindsey Piegza, market analyst at FTN Financial in New York. "This is one of the most significant downward quarters for jobs in post World War (Two) history." The Labour Department said the unemployment rate jumped to 7.2 percent last month, the highest since January 1993, from 6.8 percent in November. The rise was driven by massive layoffs in all major sectors except government, education and health. In all, employers cut nonfarm payrolls by 524,000 last month. While that was a bit less than analysts had predicted, job loss totals for October and November were revised upward and came in much higher than previously estimated.
Led by rapidly falling oil prices, the U.S. trade deficit narrowed to its smallest level in five years in November. Exports and imports each fell significantly in the month as the global recession swept around the globe. The trade balance narrowed substantially to -$40.4 billion in November, a 28.7% reduction from the prior month`s -$56.7 billion level. Total imports were down a whopping 12.0% to $183.2 billion, down from $208.2 billion in the prior month. Demand for goods fell 13.9%, capital goods fell nearly 6%, and imports of industrial supplies plummeted 25.5%. Total exports were $142.8 billion, a 5.8% cutback from the prior month`s $151.5 billion level. Goods exports fell 7.2% in the month, capital goods declined nearly 4%, and exports of industrial supplies dropped 13.4%.
Imports of crude oil plummeted 36% in the month; the price of crude oil fell to $66.72 per barrel in the month, down from $92.02 in October. November saw 8.72 million barrels imported each day, down from 10.5 million in October. Petroleum excluded, the trade balance shrunk 7.8% to -$21.1 billion, down from -$24.4 billion in October.

Economy of The European Union

Eurozone industrial production continued to decline for the seventh consecutive month in November, official data showed. Elsewhere, the Organization for Economic Cooperation and Development or OECD forecast deepening recession in the euro area. Data released by the Eurostat showed that industrial production declined 7.7% year-on-year in November, following a 5.7% drop in October, which was revised from 5.3% fall originally reported. The November decline was quicker than expected drop of 6.1%. On a monthly basis, industrial production declined 1.6% in November after falling at the same pace in October. Economists had expected a 2.1% fall in November, while the decrease recorded in October was revised from a 1.2% fall reported initially. With the latest fall, industrial production declined for the third straight month. In November, production of non-durable consumer goods grew 0.1% month-on-month and that of energy decreased 1.5%. Output of capital goods declined 1.8% followed by 2.4% fall in durable consumer goods production. Intermediate goods production fell by 2.8% in both zones. Among the member states for which data were available for November 2008, industrial production fell in eighteen and rose only in Ireland and Greece. The most significant falls were registered in Slovenia, Estonia, Slovakia and Portugal.
Eurozone inflation eased to its lowest level since the launch of euro ten years ago, official data showed. Deteriorating economic sentiment and rising unemployment amid recession add pressure on the European Central Bank to cut interest rates again. A flash estimate released by the Eurostat showed that annual inflation eased to 1.1% in January from 1.6% in December. Annual inflation stood below the expected rate of 1.4% and the central bank`s target rate of below, but close to 2% over the medium term.
Euro zone unemployment rose to 8.0 percent in December from an upwardly revised 7.9 percent of the workforce in November, data from European Union statistics office Eurostat showed. Economists polled by Reuters had expected an increase to 7.9 percent from the previously announced November figure of 7.8 percent. The then-15 nation euro zone swung to a 7 billion euro external trade deficit in November from a 2.3 billion surplus in the same month in 2007, the statistical agency Eurostat reported. The gap exceeded forecasts for a 3.5 billion euro deficit. The revised October balance posted a 500 million euro surplus. Between October and November, exports dropped 4.7%, while imports fell by 2.5%, Eurostat reported.

Economy of Japan

The pain of Japan`s recession is spreading from the factory floor to the living room, as December figures showed companies slashed output at a record pace, the jobless rate surged and household spending fell sharply. Japanese industrial production fell a record 9.6 percent in December, while core annual inflation slowed to 0.2 percent, in further signs of a deepening recession. Adding to the pain, the jobless rate rose to 4.4 percent in December and the availability of jobs sank to a five-year low, while household spending slid much more than expected - 4.6 percent from a year earlier.
Meanwhile, Japan`s unemployment rate jumped to 4.4 percent from 3.9 percent in November — the biggest increase in almost 42 years, according to the Ministry of Internal Affairs. Household spending dropped a worse-than-expected 4.6 percent in December, falling for the 10th straight month.
The nationwide core consumer price index (CPI), which excludes fresh fruit, vegetables and seafood but includes oil products, rose 0.2 percent in December from a year earlier. That compared with a consensus market forecast for a 0.3 percent gain, following a 1.0 percent rise in November. Core CPI in the Tokyo area, available a month before the nationwide figures, rose 0.5 percent in January from a year earlier, below forecasts for a 0.6 percent gain, following a 0.8 percent rise in December.
Japan`s Trade Balance saw the deficit widen as exports plunged -35% in the year to December, the worst reading on record and the largest drop in at least 28 years. Exports to the US and Europe dropped by the most ever, down -36.9% and -41.8% respectively. Shipments to Asia fell -36.4% while those specifically to China dropped -35.5%, suggesting emerging markets are quickly catching up with the worldwide economic slowdown. Dwindling global demand has pushed companies to cut back production capacity and boosted unemployment, weighing on consumer spending and depressing overall economic growth. The central role of overseas buyers in lifting Japan out of recession may prompt policymakers to take the more drastic step of intervention in the forex market to drive down the value of the Yen, making Japanese exports cheaper and thereby more attractive. A trade-weighted index of the Japanese Yen`s average value against the world`s top currencies rose 30.3% through 2008 as widespread flight from risky assets saw investors unwind carry trades funded by the perennial low-yielder.

Economy of Russia

Russia`s economy contracted 0.7 percent in December, Interfax news agency reported on Jan 26, quoting an unnamed source. The December decline reins in full-year 2008 growth to 6.0 percent, broadly in line with expectations and down from 8.1 percent in 2007, Interfax reported. It also said that capital investment in Russia fell 2.3 percent in December.
Russia`s economy will contract by 0.2 percent this year, deputy economy minister Andrei Klepach said, slashing an earlier forecast that called for 2.4 percent growth in 2009, from around 6 percent in 2008. "I confirm these numbers," Klepach told Reuters by phone, confirming a report on the revisions by Russia`s Interfax news agency. The forecast revisions, based on a new and sharply lower average oil price assumption of $41 per barrel, still see a $24 billion trade surplus in 2009, due to rapidly shrinking imports.
Prime Minister Vladimir Putin ordered officials to recalculate the 2009 budget taking into account the lower oil price. The new budget is likely to have a deficit, which Russia plans to cover from its rainy day oil funds. Economy Minister Elvira Nabiullina said earlier she saw the rouble at an average of 35.1 to the dollar in 2009, according to the forecast.
Inflation in Russia has been 1.2% so far this year, against 1.8% for the same period last year, the Federal Statistics Service said. Between January 13 and January 19 consumer prices increased 0.4%. According to government officials and experts, inflation for the whole of January is expected to be lower than in January 2008 but could rise in February.
Finance Minister Alexei Kudrin said Monday that Russian consumer prices could grow 13% in 2009. In 2008, Russia`s inflation reached 13.3%, according to the Federal Statistics Service. Russia`s consumer prices could grow 13% in 2009, Russian Finance Minister Alexei Kudrin said at the Asian Financial Forum. In 2008, Russia`s inflation reached 13.3%, according to Russia`s state statistics service, Kudrin said on the first day of the two-day forum in Hong Kong. "We expected it [inflation] to fall to 11%, but in connection with (the ruble`s) devaluation which will affect the growth of prices for imports, we now expect it to be around 13%," said Kudrin, who is also a deputy prime minister.