Published: June 01, 2009 08:20 am      

Survey gives picture of global economy over next few years

A recent survey of economists requested a forecast for the U.S. economy.

The median forecast for the unemployment rate in 2010 was 9.6 percent and an average forecast of 8.5 percent in 2011.

The median forecast called for a 1.9 percent decline in gross domestic product in the second quarter of 2009 and a positive growth rate of 0.5 percent in the third quarter.

The median forecast for GDP growth in 2010 was 1.9 percent and only 2.8 percent in 2011.

These are some signs of improvement but indicate our current problems will take some time to rectify.

During April, the International Monetary Fund issued a white paper on global economic trends. According to this research, the advanced global economies experienced an unprecedented 7.25 percent decline in real GDP during the fourth quarter 2008 with emerging economies contracting 4 percent in the aggregate. Estimates of write-downs of U.S. originated assets by all financial institutions over the period 2007-2010 would be $2.7 trillion and total global write-downs would be $4 trillion with 2/3 falling on banks and the remainder on insurance companies, pensions, hedge funds and other intermediaries.

Global activity is projected to decline by 1.3 percent in 2009 but growth is to reemerge in 2010, but only at a 1.9 percent rate. The prediction is that even with the end of the current crisis, output growth will be below rates seen in the recent past, financial leverage will need to be reduced, fiscal deficits will need to be rolled back as the population aging accelerates in some advanced economies and households rebuild savings.

All of these will weigh on actual and potential growth. The report notes that the risks of deflation, a prolonged decline in prices, have risen. The IMF cites a moderate risk of deflation in the U.S. and Euro Zone, while it saw a significant likelihood of deeper price deflation in Japan.

There is little solace in knowing that we are not alone. In large part, the response and remediation efforts have come from central banks and governments in the form of stimulus plans. These vary by region and country, some providing tax breaks, cash injection to banks and long-term investment in infrastructure. The effectiveness of these measures may determine the speed and strength of the recovery.

The U.S. Congress passed a $787 billion package, by far the largest government stimulus plan, representing 5 percent of GDP. Thirty-eight percent of the plan is targeted aid, such as Medicaid funding, money for schools and extension of jobless benefits. Tax cuts represent another 38 percent. The remaining 24 percent targets infrastructure and updating various programs. The U.S. Treasury unveiled a four point program in February to stabilize the financial markets which was initially greeted with skepticism, particularly the Public-Private Investment Program.

Europe’s largest economy, Germany, created two stimulus plans, representing 1.6 percent of their GDP, creating subsidies for purchase of “green” vehicles, cuts in taxes and insurance fees and investments in their infrastructure. France’s program, at 1.3 percent of GDP, includes funds for small infrastructure projects and aid for airplane manufacturer, Airbus, and nuclear energy. The U.K. injected funds into their banking sector and reduced their value added tax.

Japan, Asia’s largest economy, introduced several packages of credit guarantees, small business loans, credits for small businesses, cash paybacks to consumers, reduced payroll deductions and highway fees. The most recent aspect included cash payments to all residents, support for banks and loans to the unemployed. The fastest growing global economy, China, created a massive $585 billion stimulus program, 7 percent of that country’s GDP. The focus is on a mix of infrastructure projects and social programs. The Chinese banks have also been aggressive in issuing new loans. It must be remembered that the Chinese economy is centrally planned with the government owning majority stakes in the banks and construction companies.

Most of the global responses have been efforts to stimulate the private sector. Infrastructure projects provide jobs thereby providing paychecks and stimulating consumer spending.

These also provide demand by construction companies for equipment and materials to complete these projects. Tax cuts and credits attempt to put more money into taxpayers’ pockets, further stimulating demand.

One feature of this downturn has been the reduction of the availability of credit, due to a weakened lending structure, and demand for credit as businesses and consumers save cash to repair their balance sheets. The government becomes the lender and spender of last resort, at least until such time as the private sector recovers, and consumers and businesses become more confident in growth prospects and resumes their position of fueling the economy.

Regionally, the purchasing manager indexes in the U.S. and emerging markets are starting to show the first signs of improvement, while Europe and Japan are lagging.



David Helscher is a senior vice president and trust officer with Clinton National Bank.