International Economic Update

Global Growth Declines Further
January 2009

The latest data indicate a further weakening of global economic conditions and a deteriorating outlook. A rapid decline in output and a drop in commodity prices have caused inflation to subside, allowing central banks to ease monetary policies and implement growth-stimulating policies. International trade has plunged due to softening global demand and is expected to shrink further in the coming months.

More Evidence of Weakening Global Activity

Industrial production in most countries fell in the last two quarters of 2008, with steep declines particularly from September to October due to the intensification of the financial crisis (Chart 1).

Japan's industrial production decreased 8.1 percent (month-over-month) in November, the sharpest drop since the 1950s. In the U.S., industrial production fell by 7.8 percent (year-over-year) in December. Manufacturing survey data captured in the December purchasing managers' index (PMI) suggests further weakening in the advanced economies and key emerging markets such as China, Brazil and Russia. The J.P. Morgan global manufacturing PMI survey sank to a record low reading of 33.2 in December (Chart 2).

Deteriorating Outlook

The slowdown in the major economies is forecast to continue through 2009. Consensus forecasts show downward revisions to 2009 growth, suggesting a further deepening of the current recession in advanced economies. The escalation of the global financial crisis in September caused a significant downward shift in growth forecasts as market expectations deteriorated (Chart 3). The U.S., U.K., the euro area and Japan are expected to remain in negative growth territory in 2009. Expansion in the emerging economies will be affected by the downturn in the industrialized nations through depressed trade flows, falling commodity prices, disruptions to financial flows and softer investment growth. Weak growth rates are expected in these regions, although they will be significantly higher than those of advanced economies.

Weakening Global Trade

The volume of international trade is expected to continue to decline in coming months as softening demand in the industrial countries negatively impacts growth in the export-dependent emerging economies. The Baltic Dry Index, a major indicator of global trade activity, declined sharply in 2008 (Chart 4). This index measures the demand for shipping capacity to transport commodities relative to supply of dry bulk carriers. According to World Bank estimates, global trade is expected to decrease by 2.1 percent in 2009, the first such decline since 1982.

Subsiding Inflation

Falling oil and commodity prices and declining aggregate demand worldwide have caused inflationary pressures to dissipate rapidly and increased the risk of deflation in some economies. From their peak in July 2008 to January 2009, oil prices have plummeted more than 60 percent (from $145.66 on July 11 to $45.47 on January 23 ).The prices of other commodities, including agricultural raw materials, metals and basic grains, have also dropped significantly and are expected to decline more, given weakening global demand. However, OPEC's proposed oil supply cut may keep oil prices from falling further. The year-over-year December inflation rates in the U.S. and the euro area have dropped to their lowest points since 1999 (Chart 5). In China, inflation decreased sharply from 8.6 percent in April to just 2.4 percent in November (Chart 6).

Monetary and Fiscal Policies

Policymakers are seeking to restore confidence in financial markets to normalize credit flows and stimulate demand.

The Bank of England, the European Central Bank and the Bank of Japan recently cut their rates, as did Hong Kong, Kuwait, Saudi Arabia, China, the Czech Republic and several others. In November, the European Commission approved 26 proposals for an E.U.-wide fiscal stimulus package worth 200 billion euros. China, Japan and Russia also recently approved fiscal stimulus packages. While these fiscal and monetary policies are aimed at stimulating demand, it is important to note that it takes some time before these policies gain traction in the real economy.

—Janet Koech

About the Author

Koech is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.

 

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