International Economic Outlook

This report sees US output falling during the first half of next year, then gradually picking up as the effects of the credit squeeze abate, the housing downturn bottoms out and the impact of lower interest rates takes hold. Weak household spending due to large losses in households’ wealth will limit the strength of the recovery. US GDP is projected to fall 0.9 percent next year, before rising 1.6 percent in 2010.

Euro area activity is also expected to fall over the next six months as consumption and investment declines. A gradual recovery should then take hold in the wake of interest rate cuts and the easing of financial market turbulence. Euro area GDP is forecast to fall 0.6 percent in 2009 and climb 1.2 percent in 2010.

The downturn is expected to be severe in economies most vulnerable to the financial crisis or to sharp house price falls. These include Hungary, Iceland, Ireland, Luxembourg, Spain, Turkey and the UK.

A brief growth spurt is expected in Japan in early 2009 due to a government budget stimulus, but output is set to stagnate over the second half of the year. There is a risk that deflation may return. Japan’s GDP will fall 0.1 percent in 2009 then rise by 0.6 percent in 2010, according to my opinión.

The global slowdown will also affect the major emerging-market economies such as China, Brazil, Russia and India. Here, however, the downturn will be from high growth levels.

Financial markets are expected to remain strained during 2009. In the advanced economies, market conditions will likely continue to be difficult until forceful policy actions are implemented to restructure the financial sector, resolve the uncertainty about losses, and break the adverse feedback loop with the slowing real economy. In emerging economies, financing conditions will likely remain acute for some time—especially for corporate sectors that have very high rollover requirements.

Emerging and developing economies are experiencing a serious slowdown.
Growth in emerging and developing economies is expected to slow sharply from 6¼ percent in 2008 to 3¼ percent in 2009, under the drag of falling export demand and financing, lower commodity prices, and much tighter external financing constraints (especially for economies with large external imbalances). Stronger economic frameworks in many emerging economies have provided more room for policy support to growth than in the past, helping to cushion the impact of this unprecedented external shock. Accordingly, although these economies will experience serious slowdowns, their growth is projected to remain at or above rates seen during previous global downturns. Developing countries in Africa and elsewhere are also better prepared this time to face policy challenges because of improved macroeconomic policy implementation, but the continent is in a weaker position than most other regions because of its poverty levels and reliance on commodity exports.

Strong and complementary policy efforts are needed to rekindle activity.
Policy efforts so far have addressed the immediate threats to financial stability (through liquidity support, deposit insurance, and recapitalization schemes), but they have done little to resolve the uncertainty about the long-term solvency of financial institutions. The process of loss recognition and restructuring of bad loans is still incomplete. Therefore, financial sector policies should focus on advancing this process by forcing credible and coordinated loan loss recognition and by providing public support to the viable financial institutions. Such policies should be supported by measures to resolve insolvent banks and set up public agencies to dispose of the bad debts, including possibly through a "bad bank" approach, while safeguarding public resources.

Monetary policy remains an important policy lever. The projections incorporate a substantial easing in policy rates, although the effectiveness of interest rate cuts to support activity is likely to be constrained as long as financial conditions remain disrupted. With interest rates approaching zero in several major countries, central banks are exploring alternative policy approaches that rely on using their balance sheets to ease monetary conditions further. The focus should be on unlocking key (high-spread, low-liquidity) credit markets.

Conclusions

Looking to the future, it is necessary to assess
how the shocks will likely work their way
through the world economy.My forecasts are
based on three major assumptions. The first
is that commodity and oil prices are likely to
stabilize, relieving pressure on inflation and
giving more room, if needed, for expansionary
policies. The second is that U.S. housing prices
and activity will hit bottom within the next year,
leading to a recovery of residential investment.
The third is that, although credit will remain
tight, the elements of a systemic solution to the
financial crisis are now being put in place and
will prevent a further worsening of financial
intermediation. It is this combination that leads
us to forecast that world growth will begin to
recover at the end of 2009, albeit at a very slow
pace. There is, however, more than the usual
amount of uncertainty, and the downside risks
are far from negligible.

Bibliography

*Organization for Economic Co-Operation and Development(OECD)

*IMF World Economic Outlook Update-Global Economic Slump Challenges Policies,January 28,2009

Author:Dr Omar Gómez C,Senior,Ph.D.Post-Doctorate in Management of the Organizations from URBE,Maracaibo,Estado Zulia,Venezuela.Ph.D in Business Administration in Business Management from University of Aberdeen,South Dakota,United States.Ph.D in Political Economy from Thomas Alva Edison College,
United States.Economist from Universitatis Sancti Pauli Sigilium,Geneva,Switzerland.