Global Economies

How the world economies are expected to perform

The wind has veered round. It’s official now that developed economies are in recession and
may slip into a deep and prolonged recession. The GDP statistics clearly show that these
economies are mired in. Consumer spending, job losses, production cuts, postponement or
cancellation of projects are being reported everywhere. Weakening exports, falling domestic
demand & corporate earnings and deteriorating business conditions present gloomy future
outlook for the economies across the globe. Overall weakness stems largely from a sharp
pullback in corporate investment amid the unfolding global financial crisis.

Growth prospects

With the announcement by NBER, it became official that the US was in recession. Further, it’s
expected that the next quarter will also be negative. Other regions that are already in
recession include Europe area, Japan, New Zealand and Singapore. Growth in developing
and emerging markets like China and India, too has taken a hit as their growth rates have
been significantly scaled down. We have GDP forecasts by both the IMF and World Bank and
both estimate that the world economies will contract sharply in 2009. However both predicts
that the economies will rebound in 2010 but given the magnitude of the current financial crisis,
the depth of the coming recession is difficult to gauge. As far as India is concerned, IMF
predicts she will grow by 6.3% in 2009 while the World Bank estimates put it at 5.8%, much
below than the previous growth rate of 9% in 2008.

Stimulus packages

In our reports “The Bailouts” dated Nov 2008, we had expected that Indian government was
likely to unveil a stimulus package soon. Here we reproduce the country wise total cost of
such packages as below:

US Europe Japan China Russia India

$ billion
1st Trench 3500 3900 275 586 210 6
% of GDP 25% 31% 6.4% 5% 9.9% 0.2%
2nd Trench# 700 260 216
Source: www.chinaview.cn, bailoutsleuth.com, # Bloomberg report, Artha Money Research

# Reports suggest that respective governments are considering another round of stimulus
package to shore up the economic growth. Recently, a group of CEOs had urged Obama for
another $500 billion stimulus who said it would be his top priority. We may see a flurry of such
steps in days to come. Indian government has already hinted to unveil a second stimulus
package aimed at employment generation and meeting credit needs of the industry. It will look
at the engineering sector, refinance facilities for exporters, textile and agriculture sectors. But
the billion dollar question is whether such steps will really shore up the economic growth and
Deepak Tiwari put the economies on the growth trajectory?
Research Analyst

deepakt@arthamoney.com
The chart depicted on the page no. 3 onwards shows that EU area and Japan has been
T: + 91 22 4063 3032 continuously growing negatively. The similar trend is found in the case of China, India and
Russia. However they have maintained excellent growth rate despite the slowdown. Brazil
and the US give mixed trend. In case of the US, the final figures contradict the advanced
figures on many occasions.

Dec 13, 2008 For Private Circulation only 1

The painful slowdown to stay

With the announcement by National Bureau of Economic Research (NBER), it became official that the US was in recession. A
recession is commonly defined as two consecutive quarters of negative growth. But the NBER defines a recession as a significant
decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real
income and wholesale/retail trade. Further, it’s expected that the next quarter will also be negative. Other regions that are already in
recession include Europe area, Japan, New Zealand and Singapore. Growth in developing and emerging markets like China and
India, too has taken a hit as their growth rates have been significantly scaled down.

Recently the World Bank revised its growth forecasts and drastically scaled down its projections for the global economies. Before
this, the IMF had revised its forecasts in the month of November. Those forecasts have been reproduced hereunder for the
variations between them. One may notice that both of these institutions have predicted negative growth for developed economies
while BRIC countries are set to slow down rapidly.

GDP Forecasts for 2009

US Europe Japan China India Brazil Russia World
IMF Projection -0.7 -0.5 -0.2 8.5 6.3 3.2 5.8 2.2
World Bank Forecast -0.5 -0.6 -0.1 7.5 5.8 2.8 3.0 0.9
Sources: IMF and World Bank

From the following table we can observe that developed economies are expected to bounce back in 2010 after being mired in
during the current fiscal. BRIC countries are expected to grow smartly. India which is projected to grow by 5.8% during the current
fiscal would rebound in 2010 with 7.7% economic growth.

World Bank Forecast

US Eurozone Japan China India Brazil Russia World
Year Real GDP Growth in %
2006 2.8 2.9 2.4 11.6 9.7 3.8 7.4 4
2007 2.0 2.6 2.1 11.9 9.0 5.4 8.1 3.7
2008 1.4 1.1 0.5 9.4 6.3 5.2 6.0 2.5
2009E -0.5 -0.6 -0.1 7.5 5.8 2.8 3.0 0.9
2010E 2.0 1.6 1.5 8.5 7.7 4.6 5.0 3.0
Sources: IMF and World Bank

If we compare the forecast made by the IMF, World Bank and that of OECD we will notice a big difference among forecasts
particularly for the US economies. An OCED projection appears to be the most conservative one.

OECD Projections
US Eurozone Japan
Year Real GDP Growth in %
2008 1.4 1.1 0.5
2009E -0.9 -0.5 -0.1
2010E 1.6 1.2 0.6
Sources: Reuters UK

Dec 13, 2008 For Private Circulation only 2

GDP Growth in Developed Economies

US EU-Area

3.5 3.5 3.3

3.2 3.2
3.1
3.0
2.9
3.0 2.8 3.0
2.7
2.6 2.6
2.5
2.4 2.4
2.5 2.3 2.5
2.1 2.1 2.1

2.0 1.8 2.0

1.4
1.5 1.3 1.5

1.0 1.0
0.7
0.6

0.5 0.5

0.0 0.0

The US GDP data: Advance vs. Final Figures

Japan
Advance Figures
5.0 3.5
Final Figures 3.2
3.0
4.5
3.0

4.0 2.4
2.5 2.3
3.5 2.0 2.0
2.0 1.8 1.8
3.0
1.4
2.5 1.5

2.0 1.0
0.7
1.5
0.5
1.0
0.0
0.5
-0.1
-0.5
0.0

Dec 13, 2008 For Private Circulation only 3

GDP Growth in BRIC Countries

China India

14.0 12.0
12.6
11.7 10.0 10.1
12.0 11.5 11.5 9.7
11.2 10.0 9.6
9.3 9.2 9.3
10.4 10.6 10.4 10.6
10.1 8.8 8.8
10.0 7.9
9.0 7.6
8.0

8.0

6.0

6.0

4.0
4.0

2.0
2.0

0.0 0.0

Brazil Russia

7.0 10.0 9.5

6.2 6.1
5.9 9.0 8.5
6.0 5.6 8.0 8.1
5.4
5.1 8.0 7.4 7.5 7.4 7.5
7.3
5.0 7.0
4.4 4.4 6.3
4.0
6.0
4.0

5.0
3.0
4.0

2.0 3.0
1.5
2.0
1.0
1.0
NA NA
0.0 0.0

Dec 13, 2008 For Private Circulation only 4

World Bank’s Forecast for the 2009 and 2010

The recent World Bank Report gives a very gloomy picture for the developed economies till 2010. It is unable to gauge
the depth of ensuing recession considering the dramatic developments in last quarter of 2008. Should credit markets
remain frozen and asset prices continue to fall, then the decline in output over the next year could be extreme, it
concludes. However, the extraordinary measures being taken by fiscal and monetary authorities are expected to
eventually restore confidence so that banks will no longer hoard cash, and businesses can obtain the finance
essential for normal operations. Nevertheless, the outlook for OECD countries remains grim. The US government
introduced a $700 billion rescue package and has taken equity positions in nine major banks and several large
regional banks. Various debt and deposit guarantees have also been introduced. On the other hand, European
governments have announced plans for equity injections and purchases of bank assets worth some $460 billion, along
with up to almost $2 trillion in guarantees of bank debt. This outlook comes out in the backdrop.

As far as developing countries are concerned, it observes that they have been hit the most. Of the 20 developing
countries whose economies have reacted most sharply to the deterioration in conditions (as measured by exchange
rate depreciation, increase in spreads, and equity market declines), 6 come from Europe and Central Asia, and 8
from Latin America and the Caribbean.

Import demand is projected to decline by 3.4% in high-income

countries during 2009.

Net private debt and equity flows to developing countries are

projected to decline to about $530 billion in 2009, from $1
trillion in 2007.
Investment growth in developing countries is projected to slow
dramatically, rising only 3.5% in middle-income countries
against 13.2% increase in 2007.
Global export volumes are likely to fall by 2.1% in 2009.

Slower growth in high-income countries may reduce remittance

flows into developing countries from 2 to 1.8 % of recipient
country GDP between 2007 and 2008.
Situation remains unstable and a wide range of outcomes are
possible, including a scenario where the rebound of growth in
2010 is weaker. A sharper recession cannot be ruled out.
1/3rd of developing countries are running current account
deficits in excess of 10% of GDP, many of which may be forced
to restrict domestic demand severely as capital inflows dry up.
Much tighter credit conditions will see investment and GDP
growth slow sharply. The slowdown is likely to be more
pronounced in 2009.
Prudent and vigilant policies are key as uncertainty continues
to cloud the outlook.

It’s important for policy makers to react quickly to emerging

problems and focus on overcoming some of the fundamental
sources of weakness.

Dec 13, 2008 For Private Circulation only 5

Some of the key features of the report are reproduced as follows:

 Import demand is projected to decline by 3.4% in high-income countries during 2009, while net private debt
and equity flows to developing countries are projected to decline from $1 trillion in 2007 to about $530 billion
in 2009, or from 7.7 to 3% of developing-country GDP.

 Investment growth in developing countries is projected to slow dramatically, rising only 3.5% in middle-income
countries, compared with a 13.2% increase in 2007.

 Global export volumes are likely to fall by 2.1% in 2009—the first time they have declined since 1982 while
export credits are drying up and export insurance has become more expensive. Slower growth in high-
income countries is estimated to have reduced remittance flows into developing countries from 2 to 1.8 % of
recipient country GDP between 2007 and 2008.

 Although this sober outlook represents a likely outcome, the situation remains unstable, and a wide range of
outcomes are possible, including a scenario where the rebound of growth in 2010 is weaker, held back by
continuing banking sector restructuring, and negative wealth effects resulting from lower housing and stock
market prices. An even sharper recession is also possible.

 Countries that now have large current account deficits and high inflation could suffer from a renewed
overheating of their economies. Policies would have to be very prudent in these circumstances, because the
currencies of these countries are likely to remain sensitive to changing market perceptions and increased risk
aversion. The challenge for policy makers is not only to prevent an escalation of the crisis and to mitigate the
downturn but also to ensure a good starting position once the rebound sets in. For developing countries, this
means responding rapidly and forcefully to signs of weakness in domestic banking sectors, including resorting
to international assistance where necessary.

 One-third of developing countries are running current account deficits in excess of 10% of GDP, many of
which may be forced to restrict domestic demand severely as capital inflows dry up. Current Account is the
sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest
and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most
important part of the current account.

Dec 13, 2008 For Private Circulation only 6

The scene is not so different for India

Agriculture, industry and services sectors contributed 17.8%, 29.4% and 52.8% respectively to the India’s GDP in
2007. Unlike China’s over 30-35%, India’s exports contribute about 21% to the total GDP. The recent trends show that
India’s growth is under tremendous pressure. Export in the month of October has already declined by 12% and even
the future is murkier. Recent IIP data have also placed a very gloomy outlook. The industrial output reported a
negative growth of 0.4% yoy during October 2007 first time in 15 years. The cumulative growth for the period April-
October FY09 stood at 4.1% over the corresponding period of the previous year. Sectors that registered negative
growth in the period are leather & fur products (-18.1%), textile & apparels (-4.6%), cotton textiles (-9.6%), chemical
products (-5.5%) and transport equipment & parts (-6.1%). It indicates that the export in the coming months will further
decline. Manufacturing, capital goods and consumer goods too declined significantly. They grew by 1.2%, 3.1% and -
2.3% against 13.8%, 20.9% and 13.7% respectively a year ago. Mining output grew by 2.8% against 5.1% in the
corresponding month of the previous year. It’s expected that industrial output will remain subdued at least in the Q3
FY09. They may improve in the last quarter of this fiscal when the recent monetary and fiscal measures will take full
effects. Despite this, Indian economy will not remain insulated and in case of any unexpected shock to developed
countries, tremors will be felt in the emerging markets like India as well.

The Indian government recently announced an Rs 30,700-crore fiscal stimulus package encompassing additional
spending and excise duty cuts aimed at boosting domestic consumption. It announced Rs 20,000 crore in additional
expenditure, an across-the-board 4% excise duty cut amounting to Rs 8,700 crore and benefits worth Rs 2,000 crore
for exporters. In addition, the government expects to precipitate infrastructure projects worth Rs 100,000 crore through
faster clearances of public-private partnership (PPP) projects, and ensure their easier financing by way of a tax break
on fund raising by the India Infrastructure Finance Company (IIFC). The government will also take steps to ensure that
already budgeted expenditure of Rs 300,000 crore will actually be spent over the next four months of the current
fiscal. The government is likely to announce more such package in the coming week. But if we compare the size of
this package with that announced by other countries, we may think this too little and too late. As the World Bank call
for the governments, they must react quickly to the emerging problems and their steps must focus on overcoming
some of the fundamental sources of weakness.

Sector wise contribution to GDP in 2007

Country Agriculture Industry Service
Brazil 5.5 28.7 65.8
China 11.3 48.6 40.1
EU 2.1 27.1 70.7
India 17.8 29.4 52.8
UK 0.9 23.4 75.7
US 1.2 19.8 79
Pakistan 20.6 26.6 52.8
Russia 4.7 39.1 56.2
Source: WDI

Dec 13, 2008 For Private Circulation only 7

GDP Growth, Inflation, Interest rates and unemployment across the economies

GDP Growth in %
Developed Economies BRIC Countries
EU-
Quarter ended US Area Japan China India Brazil Russia
Sep-08 0.7 0.6 -0.1 9.0 7.6 NA NA
Jun-08 2.1 1.4 0.7 10.1 7.9 6.1 7.5
Mar-08 2.5 2.1 1.4 10.6 8.8 5.9 8.5
Dec-07 2.3 2.1 1.8 11.2 8.8 6.2 9.5
Sep-07 2.8 2.6 1.8 11.5 9.3 5.6 7.3
Jun-07 1.8 2.6 2.0 12.6 9.2 5.4 8.1
Mar-07 1.3 3.2 3.2 11.7 9.7 4.4 7.4
Dec-06 2.4 3.3 2.4 10.4 9.3 5.1 8.0
Sep-06 2.4 2.9 2.0 10.6 10.1 4.4 7.5
Jun-06 3.2 3.0 2.3 11.5 9.6 1.5 7.4
Mar-06 3.1 2.7 3.0 10.4 10.0 4.0 6.3
CPI inflation 3.7 3.2 1.7 4.0 8.0 6.4 13.8
Interest rate 1.0 2.5 0.3 5.6 6.0 13.7 13.0
Unemployment 6.7 7.7 3.7 4.0 NA 7.5 6.1
Source: www.tradingeconomics.com, Artha Money Research. All figures in %age. NA Stands for Not Available.

Economies at a glance in 2008

Current
Fiscal A/C Balance of GDP - Fiscal Current
CountryName Deficit balance Trade PPP Deficit/GDP A/C/GDP Export/GDP
Advanced Economies
United States -163 -747.1 -847 13860 -1.2% -5.4% 8.2%
Japan -112 201.3 94.6 4305 -2.6% 4.7% 15.5%
United
Kingdom -82 -111 -180 2147 -3.8% -5.2% 19.4%
France -61 -35.94 -42.5 2067 -3.0% -1.7% 27.0%
Germany -12 185.1 240 2833 -0.4% 6.5% 48.0%
Developing Markets
China 6 363.3 303.6 7043 0.1% 5.2% 17.3%
India -37.2 -18.53 -83.3 2965 -1.3% -0.6% 4.7%
Brazil 24.1 10.2 43.6 1838 1.3% 0.6% 8.7%
Canada 14.6 28.46 45.7 1274 1.1% 2.2% 34.5%
Hong Kong 3.75 19.87 -18 293.4 1.3% 6.8% 120.4%
Russia 98.1 68.5 122.4 2076 4.7% 3.3% 16.8%
Korea, South 4 3.7 27.1 1206 0.3% 0.3% 32.1%
Saudi Arabia 71.5 88.89 132.23 572.2 12.5% 15.5% 37.6%
South Africa 1.31 -16.28 -5.07 467.6 0.3% -3.5% 15.3%
Pakistan -6.57 -6.477 -10.41 446.1 -1.5% -1.5% 4.6%
Source: CIA World Factbook, Artha Money Research, All figures are in USD billion except %age ratios. In order to compare countries statistics, GDP figures have been
taken on Purchasing Power Parity (PPP) basis.

Dec 13, 2008 For Private Circulation only 8

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Dec 13, 2008 For Private Circulation only 9