In aggregate GDP growth in these countries is expected to be (minus) -0.8% in 2009, compared to an estimated 1.1% for 2008. Tighter credit conditions, consumer retrenchment and falling corporate investment are expected to combine to deliver an unusually synchronised downturn across the advanced economies.
World GDP will grow by just 1% next year - the slowest rate since the early 1990s - and compared to an average of 3.5% over the last five years. The combination of recession in developed countries, lower commodity prices and reduced international capital flows will result in a sharp slowdown in growth in emerging markets, though most will avoid outright recession.
The rapid intensification of the global credit crisis in the last two months and clearer evidence of household retrenchment, declining corporate investment intentions and falling world trade growth explain the sharp deterioration in the outlook since Fitch's previous Global Economic Outlook was published on July 4 2008. These factors far outweigh the benefits to income growth in the advanced economies from the decline in commodity prices.
Recession driven by a contraction in the supply of credit is uncharted territory for the world economy and there are few historical parallels on which to gauge its possible depth or length. However, the aggressive expansion of central bank liquidity provision since early September, in combination with major fiscal injections into the US and European banking systems will head off the worst-case scenario of widespread deflation. Nevertheless, the process of de-leveraging by households and companies is now underway and this will weigh on spending for some time. Declining asset prices, rising unemployment and job uncertainty will result in higher desired household saving rates, while the deterioration in the cost and availability of household credit will push the adjustment further and faster. Business investment is also likely to fall sharply, consistent with its highly pro-cyclical nature as companies anticipate weak final demand and face tough borrowing conditions.
Fitch expects that Latin America’s real GDP will contract by 0.9% in 2009, with Brazil’s economy stagnating at best and Mexico contracting by over 2%.
Latin American economies have recoupled with the crisis in the developed economies. Since September 2008, Latin American countries have been buffeted by stronger external headwinds, as evident from the fall in regional currencies and stock markets and from widening bond spreads.
Global Economic Slump Challenges Policies. World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II.
Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged.