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Global outlook

Experian’s Global Futures Service provides forecasts, analysis and expert commentary to help organisations understand the economic, financial and business climate in over 40 countries across Europe, Asia, Latin America and North America.

From this issue on we will publish some highlights of the quarterly reports for some selected countries. In this issue you can find articles on US, UK, Euerozone and BRIC contries related to the last quarter of 2008.

For further discussions with Experian Global Futures about these articles, contact us

USA - Zero interest rates

The US economy is in recession with few signs that things are going to get better in the short term. The consumer sector contracted in the 3rd quarter of 2008 and the 4th quarter of 2008 is shaping up to be an especially bad quarter in terms of economic activity.

While the economy should emerge from recession in late 2009, the US could be entering into a prolonged period of well-below-trend growth. Consumers are heavily indebted and are being squeezed by falling asset prices and rising unemployment.

What else could go wrong?

1. While a ‘technical recession’ – two consecutive quarters of contraction – has been avoided so far, the powers that be have declared what has long been known: the US economy has been in recession since December 2007. Nearly 3 million jobs have been lost since then and the domestic economy has been contracting.
2. The down turn in the 4th quarter of 2008 is likely to be even worse as it is the first quarter to reflect the impact of the financial meltdown that began in September. Evidence is that the economy likely contracted by at least 1.5% in that quarter alone.
3. The economy looks unlikely to pull out of its downward spiral until late 2009 at the earliest. Activity will shrink by more than 2% in 2009, the worst performance since the early 1980s.
4. Trends are moving sharply against the consumer. The economy is shedding jobs and asset prices continue to fall. US households have seen US$7,100bn wiped off their net worth since the onset of the credit crunch in 2007. It’s no wonder then that spending in the 3rd quarter 2008 fell in real terms for the first time since the early 1990s. With the credit crunch turning into a global financial crisis in September it seems likely that consumers will retrench considerably in the 4th quarter of 2008 and growth is not projected to return until late 2009. The recovery will be modest as households will need to repair balance sheets after years of not saving.
5. The Federal Reserve has pulled out all of the stops in an effort to stave off the worst economic downturn since the Great Depression. In its latest move, the Fed has in effect cut short-term interest rates to zero.

Key risks

1. Risks are largely on the downside. Increasingly it looks like the US could be entering into a prolonged period of well-below-trend growth. The financial sector is undergoing a massive deleveraging and consumers are heavily indebted and are being hit by falling asset prices and rising unemployment. While a prolonged recession has long been forecast, it is increasingly looking like it will be even deeper than currently forecast.

Matthew Sherwood
Senior Global Economic Adviser

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The UK Recession has arrived

The UK economy is in recession with third quarter contraction of 0.5% and an equally weak outcome probable for the current quarter. Conditions will remain very difficult in 2009, when we expect GDP to shrink by close to 3%, and recovery will be slow.

‘The central scenario is gloomy enough, but even so there are serious downside risks. They include the possibility of protracted recession, the threat of deflation, and further financial sector problems.

Worst fears are realised – a deep recession is here

1. Real GDP stagnated in the 2nd quarter of 2008, the first quarter since 1992 without growth. Worse followed with an exceptionally weak out turn in the third quarter with GDP contracting by 0.5%. Available evidence for the final quarter points to a further decline of an even worse magnitude. 
2. The housing market is in sharp decline, consumer confidence has plummeted and the credit crunch is compounding the effect of weakening personal income growth. Against this backdrop, sluggish consumer spending will undermine performance in the next few quarters. But sharply falling investment and declining exports will also depress activity.
3. From 2010 UK economic performance revives gradually, and medium-term prospects are for annual average growth of at best 2.3%, well below the long-term average.
4. The Bank of England cut rates by 200 basis points in October/November in response to mounting economic problems. Further cuts are imminent as the recession deepens and businesses struggle with cash-flow problems.  

Key risks

1. Despite massive liquidity injections by central banks, and massive bank rescue plans markets are fragile and the risk of systemic collapse or big bank failures cannot be ruled out.
2. The risk of a protracted recession accompanied by deflation is a major concern.
3. Household imbalances and less support from employment income and housing wealth in the years ahead threaten to limit medium-term growth prospects.
4. The economic slowdown, massive bail-outs and fiscal stimulus have seriously worsened fragile government finances. Restoring viability will entail tax increases and spending cuts in the medium term, also threatening growth prospects.

Sunita Bali
Senior UK Economist
Stephen Adams
Economist

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Eurozone Worst post-war downturn

The eurozone has officially entered recession, as the main drivers of growth, exports and investment, have retrenched. The downturn is expected to continue well into 2009, with a contraction of at least 2%, followed by a sluggish recovery that only really begins to gather momentum in 2010.

Persistent volatility on markets, with much tighter credit and high risk premiums, coupled with consumers remaining distressed for longer, would imply a downturn that is even deeper and easily lasts into 2010.

Recession is here to stay

1. The eurozone economy contracted by 0.2% in the 2nd quarter of 2008 and the 3rd quarter of 2008. The drivers of strong growth in 2006-07 – exports and fixed investment – both retrenched sharply, especially the latter. Compared with last year headline growth slowed to 0.6%.
2. Consumption remains in the doldrums, with spending flat in the 3rd quarter of 2008 and private consumption essentially stagnant since mid-2007. Consumer behaviour in countries like Germany partly explains this trend, but consumer pessimism has spread to the wider eurozone economy owing to the fallout from financial market turmoil and a severe cooling of previously overheating economies. The housing market downturn is also piling up pressure on households, whose debt burden and related costs are stifling consumption. Consumers are key to a recovery, yet heightened uncertainty, depressed sentiment and dire job prospects render this unlikely before 2010-11.
3. Most high frequency indicators have simply collapsed and corroborate that the downturn will be severe and likely turn out to be the worst since the second world war. The recession will be followed by a sluggish recovery in 2010 and 2011, with growth only really hitting trend growth in 2011. There will be country heterogeneity, with the extent and length of the slowdown affecting individual member states differently. In particular, some economies are exposed to country-specific imbalances – chiefly housing market adjustments – and have more severe structural problems that increase their vulnerability.
4. Inflation prospects have changed remarkably in the last few months, with very low inflation now a distinct possibility and deflation a major threat. On the back of sharp commodity price falls and base effects kicking in, previously skyrocketing annual inflation of 4% has already plummeted to 2.1% in the space of four months. We expect inflation to average around 1.5% in 2009, with significant downside risks to this forecast. The baseline has inflation gradually reverting to target thereafter.
5. After being overly concerned about rising inflation, the European Central Bank has played catch-up and slashed rates by 175 basis points in less than two months. Inflation is dissipating quickly and the economy is slowing by much more than the ECB anticipated. In an attempt to stimulate the economy and battle deflation, rates will therefore fall to a new low of 1.75% by mid-2009. Governments have also switched into action mode and agreed a fiscal stimulus package of the order of 1% of GDP.

Key risks 

1. The global credit crunch is having a dramatic impact on borrowing costs for corporates and individuals. With global growth slowing sharply and markets not expected to normalise for at least another 12 months, the current baseline forecast is still subject to considerable downside risks. In particular, if credit conditions don’t improve and confidence doesn’t rebound any time next year, then the downturn will easily last well into 2010.

Dylan Schumacher
Senior European Economist

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Overview of the Bric countries

Brazil - Back to Reality

As inflation worries leave the agenda, a weakening domestic sector faces some familiar problems. Job losses are expected in the short term with consumer trends falling back for the first time in four years.

The central bank will have difficult task keeping a balance between a cheaper real* and a weak domestic sector.

No sign of deceleration

1. GDP grew by an average of over 6% year on year during the last four quarters. This buoyancy was driven by consumer demand expanding by an average just under 7% over the same period. The result was a quickening of inflation that rose well above 6% over the second part of 2008.

2. Since December most leading indicators are deteriorating, reflecting growing concern over the health of the economy. Growing signs of a weak external sector and weary consumers have resulted in job losses.

3. The central bank is expected to cut its SELIC target by 50 bpp to 13.25% early in January, ending a short-lived tightening phased aimed at curbing inflation risk in 2008. The central bank will continue loosening policy while keeping a close watch on inflation, which needs to go back to its target of 4.5%; the exchange rate, which is showing signs of weakening; and a weakening economic environment.

4. The trade balance worsened throughout 2008 owing to the buoyant domestic environment and a world economy falling into recession. Continuing this trend Brazil’s trade balance will fall further into deficit in 2009.

5. Over the next two years Brazil will slow down significantly with a chance of stagnation in some quarters. We forecast 2.2% real GDP growth in 2009 and 3.9% in 2010. Stimulus from the government will be hard to come by.

Key risks

1. As the real weakens imported inflation will continue to put pressure on prices. The central bank will have the difficult task of balancing a strong exchange rate and a weak domestic sector.

2. Structural features such as worsening demographics, still-high trade barriers, poor infrastructure and low levels of educational attainment among its workforce pose downward risks to the long-term growth forecast.

Sebastian de-Ramon
Managing Consultant

*real - Brazilian currency

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Russia - Problems mount

The economy faces recession in the first half of 2009. A combination of lower oil prices, dour export markets and capital flight since the Georgia incursion has deflated consumer and business confidence to spend.

The effectiveness of the government’s bail-out package, proportionately bigger than the US’s, will be critical to the economy’s trajectory during the first months of 2009.

Beset by challenging circumstances, recession looms

1. A decisive devaluation for the rouble against both the Euro and US dollar is very likely in early 2009. The central bank’s strategy of incremental devaluation is losing traction as market expectations gather for a further 10%-15% drop. Monetary policy will thereafter switch focus from supporting the rouble to stimulating consumer and investment demand, with the possibility of formal inflation targeting in the next two years.

2. Unemployment will rise over 2009 and 2010 as both the private and public sectors postpone recruitment decisions until the path of the economy becomes clearer. Wage inflation will remain stubbornly high.

3. Inflation and interest rates will fall during 2009. The central bank has loosened monetary policy and encouraged interbank lending, to little effect so far. The government has embarked on a $200bn bail-out spending plan to underwrite banking and corporate sector debt. Company shares have been taken as collateral for this financial support to the oligarchs, suggesting that the state could adopt an even more interventionist role in industry in years to come.

4. Consumer spending growth will be modest compared to recent experience, with demand for cars and household durable goods weakening over the next two years. House prices are falling in the cities, adding to the wealth losses from the tumbling equity market. Consumer markets are likely to suffer from sporadic credit shortages in the short term.

Key risks

1. The balance of risk is on the downside as the economy has to deal with softening export and domestic markets, a currency depreciation and, increasingly, limited access to credit. The effectiveness of the government’s bail-out package, proportionately bigger than the US’s, will be critical to the economy’s trajectory during the first months of 2009.

2. The economy will remain highly dependent on the oil price until the industrial base is broadened. A sustained period of sub-$50 per barrel prices will turn the budget and current account surpluses into deficits, putting further pressure on the rouble.

Matthew Sherwood
Senior Global Economic Adviser

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India - Better than most

After pushing interest rates to 9% over the summer in the face of severe inflationary pressure, the Reserve Bank has had to bid a hasty retreat; India’s banks have been caught up in the global financial crisis.

The slowdown is likely to gather pace as India’s consumers are no longer immune to the global recession. That said, India’s outlook is one of the best in the world.

Growth rates soften – but economy remains robust

1. The economy expanded in real terms by 9% in fiscal year 2007/08, marking the fourth year of exceptionally strong growth. While growth remains robust, the economy has been slowing since the beginning of calendar 2007. Annual GDP growth fell below 8% in the 2nd quarter of 2008 for the first time in nearly four years and slowed further in the 3rd quarter of 2008. Imports continue to flood in, with net trade now a considerable drag on growth.

2. After showing resilience, household spending has finally been hit by the global downturn. Inflation earlier in 2008 eroded consumers’ buying-power and the sharp fall in equities prices dented sentiment. Even with the Reserve Bank of India slashing rates, it seems likely that household spending will slow further in coming quarters.

3. Real GDP growth is projected to slow from 9% in fiscal year 2007/08 to 6.4% in 2008/09 and 5.1% in 2009/10. The economy has been losing pace since the beginning of 2007 and will continue to slow as the global credit crisis hits domestic demand and the global recession hits exports.

4. Though the economy is expected to slow going forward, the longer-term picture remains very positive. There are a number of factors supportive of growth. Catch-up potential for the economy in a period of rapid globalisation is particularly strong, given the underdeveloped trade sector, alongside low income levels and labour costs. India’s competitive edge in tradable services will remain strong.

Key risks

1. Risks are related to the global recession. India’s high-spending workers are concentrated in the business services and information and communications technology. Wage rises and employment growth in these sectors are likely to slow sharply. The plummeting stockmarket will not help consumer sentiment either.

Matthew Sherwood
Senior Global Economic Adviser

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China - Flirting with recession?

The economy slowed sharply in the 4th quarter of 2008. Monthly indicators show significant weakness in manufacturing and investment activity and a sharp rise in loss-making enterprises. It is now conceivable that China actually could fall into recession.

‘The government has ample resources to help curb the impact of the global slowdown and bursting asset bubbles. In November it unveiled a Rmb4trn stimulus and additional measures have been forthcoming. Will it be enough?

Economic boom has come to an end

1. The economy slowed sharply in the 3rd quarter of 2008, with annual real GDP growth falling to 9%, a four-year low. We forecast that the pace of the slowdown would accelerate, with our projection of 6.5% growth in the 4th quarter of 2008 slightly below the mark.

2. Monthly indicators show significant slowing in manufacturing and investment activity and a sharp worsening in sentiment. The government has responded with a Rmb4trn (14% of GDP) stimulus package. Much of this is not new spending, but bringing forward infrastructure plans, subsidies and tax cuts will have an impact.

3. Earlier monetary tightening and administrative measures have had more than the desired effect and have been exacerbated by the global recession. The first half of 2009 is looking like it will be quite difficult.

4. We expect the economy to slow further in 2009, with the double-digit growth rates of 2003-07 becoming a distant memory. China’s integration into the global economy will be maturing over this period, and the processing trade will exhibit a less torrid pace of growth. China’s poor demographics will also slow economic growth in the medium to longer term.

5. The consumer sector should eventually take over from investment as the driver of growth. But such a rebalancing is likely to be gradual, particularly given investment’s substantial share of output.

Key risks

1. The feed-through of the global financial crisis since September has been faster than anyone anticipated, with China’s economic activity stagnating in the 4th quarter of 2008. With prospects worsening in China’s main export markets, the risk is significant that growth in China could well undershoot what is necessary to stave off social unrest stemming from rising unemployment. How the authorities respond will be key not just to the recovery but also for long-term prospects.

2. With loss-making enterprises on the rise, there will be questions about the health of China’s banking sector. While it has avoided the mistakes of the West, in terms of asset-backed securities, China’s exposure to nonperforming loans is likely higher than the authorities admit, especially with property and equities markets.

Matthew Sherwood
Senior Global Economic Adviser

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