World economies in 2009

We have just bid farewell to 2008, the year that marked the escalation of the global financial crisis which wreaked havoc on economies worldwide and caused several industrialised countries to slide into recession.

But 2009 holds even greater challenges as the world lives through the effects of the financial crisis. The International Monetary Fund chief Dominique Strauss-Kahn said in a recent interview with BBC radio that the organisation was going to cut its economic growth forecasts, due this month.

The World Bank has already pegged its growth forecast for the global economy at 0.9% for this year. The weakest outlook will be for the high-income countries, such as the United States, Japan and the European Union (EU), whose overall economy is expected to contract 0.1%, while developing economies as a whole are expected to register growth of about 4.5%.

World Bank chief economist Justin Lin says in the Global Economic Prospects report that “the global economy is at a crossroads, transitioning from a sustained period of very strong developing country-led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide.”

So, StarBizWeek takes you through the major economies in the world to gauge their positions as they step into 2009.

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US: Where it pays to fail

Faced with an increasingly gloomy outlook, unemployment in the United States is expected to hit 8% to 10% this year, compared with 6.7% as of November last year. The world’s biggest economy is also expected to contract further this year, with the Organisation for Economic Cooperation and Development forecasting a decline of 0.9% and Morgan Stanley Research, a 1.9% drop, for 2009.

(For the third quarter of 2008, the country’s gross domestic product (GDP) shrank 0.5% as reported by the US Commerce Department recently.)

But with US President-elect Barack Obama taking office on Jan 20, hopes for a shorter period of a languishing economy are arising. The new administration is expected to unleash a new massive fiscal plan, focusing on long-term infrastructure and job creation projects, next month to revive the country’s slumping economy.

According to Obama’s top advisers, David Axelrod and Lawrence Summers, the new economic stimulus package, spread over two years, could exceed US$775bil in value. The main goal of the package is to create or save three million jobs. In addition, Obama is expected to introduce tax policies that will favour the middle class to boost private consumption.

To date, the outgoing Bush administration has pumped in about US$1.3 trillion, including the US$700bil rescue package announced last October to bail out financial institutions that have failed due to their own reckless risk-taking activities, namely the subprime mortgage and its related businesses.

Furthermore, the US government had extended a US$17.4bil package to rescue its ailing motor industry at the end of last year, while the country’s benchmark interest rates have been slashed to the current levels of zero to 0.25% to boost its economy.

Japan: Riding into the sunset

The Bank of Japan (BoJ) said last month the country’s economic conditions were deteriorating due to poor business sentiment, weakened private consumption and the decreasing trend of industrial production.

The country’s central bank added that those conditions were likely to become even more severe in the near term as the declining exports continue to erode Japan’s national income.

Japan’s exports in November fell 26.7% from a year earlier as global demand for cars and electronics products collapsed, signalling more factory shutdowns and job cuts.

The world’s second largest economy has entered a recession since the second quarter of last year, with a contraction of 0.9% for the quarter, followed by another decline of 0.5% in the subsequent quarter.

Morgan Stanley’s bull-case scenario depicts Japan’s GDP as experiencing zero growth for 2008 and a contraction of 1.2% for 2009, while its bear-case scenario estimates Japan’s GDP to contract 0.2% and 3% for 2008 and 2009 respectively. Recovery in 2010 is expected to be tepid.

In an effort to cushion the country’s failing economy, Japan’s Prime Minister Taro Aso last month announced an economic stimulus package worth 23 trillion yen. Prior to that, the Aso government had rolled out a stimulus plan worth 11.7 trillion yen in August and another that was worth 26.9 trillion yen in October last year. On top of that, the country’s benchmark interest rate has been slashed to 0.1% currently.

EU: An empire on a bumpy road

While the outlook for the 27-nation EU remains bleak, with several of its member countries slipping into a recession this year, the empire’s economy overall appears to be in a better shape than the economies of the United States and Japan.

The European Commission forecasts the economy of the 15 countries using the euro to grow by only 0.1% this year and 0.9% in 2010. Of these countries, Germany, France and Italy are expected to post zero growth rates for 2009, while Spain and Ireland are likely to continue posting negative growth rates this year. (Slovakia will be the 16th member state to join the euro club this month.)

Among the EU member countries that do not use the euro, the UK’s economy is expected to shrink 1% this year, while Baltic states Estonia and Latvia are also likely to see negative growth this year.Last month, British Prime Minister Gordon Brown reportedly said the EU leaders had unanimously agreed on a 200 billion euros economic stimulus plan to ward off recession in the region.

In addition, the EU government-funded European Investment Bank is expected to release loans worth up to 30 billion euros between this year and 2010 to support small businesses and increase lending for projects that support renewable energy and cleaner transport, while the European Central Bank is likely to cut its main lending rate to below 2% from the current 2.5%.

Asia-Pacific: Wounded Tigers, rising Dragon

Morgan Stanley says in its report that China’s economic outlook for this year is best characterised as “getting worse before getting better.” It expects China’s economy to experience further deceleration in the first half of this year, before regaining momentum in the second half.

The massive policy stimulus implemented since last October, including progressive interest rates cuts and the four trillion yuan package, are expected to help sustain the dragon economy’s growth, albeit at a slower rate. Morgan Stanley forecasts China’s GDP this year to grow 7.5%, compared with 9.4% last year.

India, as the new tiger economy of Asia, is also expected to experience growth this year, sustained by improving domestic demand, and assuming its tension with Pakistan will be defused.

Morgan Stanley’s bear-case scenario pegs India’s GDP growth at 4.3% and bull-case scenario at 6.3%. The Indian government’s economic stimulus packages have thus far laid more emphasis on monetary than fiscal measures because of the country’s huge deficit. Hence, the government is expected to announce further cuts in key interest rates throughout this year.

Meanwhile, the outlook for the original four tiger economies of Asia remains bleak even with the various monetary and fiscal stimulus plans announced by their respective governments. Singapore and Hong Kong are expected to remain in a recession this year before recovering in 2010, while South Korea and Taiwan may manage minimal growth for the whole of this year despite a challenging first half.

On the other hand, Malaysia, Indonesia and Thailand are expected to grow slower than anticipated (not exceeding 2.5% on the average). Thailand is plagued by domestic political unrest that affects its core industry - tourism, while Malaysia and Indonesia’s trade continues to decelerate. Declining commodity prices are also affecting the income of these economies.

Down Under, the Australian government is hoping that its interest rate cuts and recent fiscal stimulus plans will prevent the country’s economy from sliding into recession. Economists predict that Australia could still manage a GDP growth of less than 1.5% this year, while New Zealand will struggle to emerge from recession.

The Reserve Bank of New Zealand recently said the country could manage a weak growth this year, with economists predicting it to be less than 1%.

GCC: Flowing with milk and honey

Blessed with huge oil reserves, the Gulf Cooperation Council (GCC), which comprises Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates, is expected to show some resilience in the midst of the global financial turmoil. This is mainly attributable to the surpluses from oil revenues when oil prices reached their peak in the middle of last year.

In addition, the GCC governments have been proactive in implementing fiscal and monetary policies to boost their economies.

Nevertheless, economic growth in the GCC region this year is expected to be slower than previous years.

The World Bank estimates the GCC economy would grow around 4% this year, compared with around 7% last year or more than 5% in the past few years.

Meanwhile, the GCC is moving towards a broader economic unity and a common currency scheduled to be launched next year. The convergence is expected to further strengthen their position in a globalised economy.

Others: Bear awakening

The World Bank recently revised its GDP forecast for Russia from its earlier prediction of a 3% growth to 2% for this year. The US$20bil stimulus package announced last November by Russia’s Prime Minister and former President Vladimir Putin is expected to strengthen the country’s economy in the face of a global slowdown.

As for Latin America and the Caribbean, the region’s economy is projected to grow only 1.9% this year amid a rising unemployment, from 7.5% last year to 7.8%-8.1% this year, according to the Economic Commission for Latin America and the Caribbean.

However, Morgan Stanley paints a gloomier picture for Latin America, predicting the region’s economy to contract 0.4% this year. It says in its report that no country in the region is likely to escape the effects of the financial crisis unscathed.

For instance, the research house says, Mexico’s economy is expected to contract 1.5% this year, while Brazil is expected to experience zero growth and Argentina to suffer from a 2.2% decline.

South Africa’s economy, the biggest on the African continent, is expected experience sub-par growth this year. Citigroup in its recent research note forecasts the country’s economy to grow 2.3%, in line with World Bank’s forecast.

World Bank in its report says South Africa’s economic growth for 2009 is likely to fall below 3% for the first time in almost a decade, as a tighter monetary policy and high inflation cause household consumption to falter.

The Star-Cecilia Kok