International outlook for 2009.

• Author: Mafi-Kreft, Elham

November 2008

After four years of strong growth, the world economy is falling into a major downturn and is forecasted to grow at only 2.2 percent in 2009. (1) This growth rate is at its lowest level since 2002 as concerns have intensified that the rich countries will face their deepest recession since the 1930s. Any growth in the world economy in 2009 will be almost entirely driven by the emerging and developing economies, whose growth will nevertheless sharply fall to 5.1 percent from 8 percent in 2007 and 6.6 percent in 2008. At the same time, inflation has risen to its highest level since 1997--reflecting the tightness in world commodity markets. The surge in inflation rates is particularly disturbing in emerging and developing markets where the substantial increase in the price of food is leading to a surge in social unrest.

Western Europe

Economies in Western Europe face many simultaneous adverse shocks. Since the end of the summer, the European news has become more depressing with each passing month. High growth countries like the United Kingdom, Ireland, and Spain have seen investments collapse and unemployment rates soar. In Spain, unemployment is expected to jump by 3.5 percent in 2009, reaching 14.7 percent--the biggest jump over the past thirty years. Economies in Western Europe will most likely contract by an average of 0.5 percent next year.

The economic deterioration is mostly due to financial system excesses, coupled with the effect of toxic assets. In the United Kingdom, mortgage lender Northern Rock had to be nationalized and the direct effect of the bursting housing bubble on the financial system seems quite severe. However, not all European countries have had, or will see, comparable impacts of the property bust on their financial systems. On the other hand, the slowdown in consumption and the global credit crunch will be felt throughout Europe and will most certainly hurt some banks. In Europe, when the banks experience a crisis of confidence, it is a proportionately greater problem than in the United States because the European economy is mostly funded by the banks.

Following the lead of Britain and the United States, several Western European governments have announced plans to help their national banking system. But given the size of each country's GDP and the absence of a federal budget, the response to the crisis cannot be as strong as the U.S. $700 billion troubled assets relief program. Furthermore, in response to...