Economic report from Economist Intelligence Unit (EUI)

Manning the barricades
March 2009
Economist Intelligence Unit

In the month  of march  Economist Intelligence Unit have issued a special report about the economic distress of the world –Manning the barricades, so I’m gonna point out some notes from the this report.

Collapsing credit has plunged the world economy into the deepest recession in more than 70 years. What began as a property bubble in the US has spread rapidly as troubled banks have stopped lending and consumers and businesses
have stopped spending. As demand in the US and Europe evaporates, once thriving emerging markets are losing their best customers and biggest investors. An increasingly synchronised global economy will contract in 2009 for the first time since World Wa r II .

The risk of political instability is leading to a wave of trade protectionism, which is rippling across the globe.

The political response to the crisis-economic nationalism is taking many forms. Barack Obama’s US$ 787 bn fiscal stimulus plan included “Buy America”  provisions, though watered down from earlier versions.
China has reinstated export subsidies, and countries from India and Indonesia to Ukraine and Russia  have raised import restrictions in some fashion.

We expect global trade to contract by 3.5% this year, and net private-sector capital flows to developing countries are likely to fall to US$ 165 bn from more than US$ 900 bn in 2007, according to the Institute for International Finance.Indeed, the vast interdependence of the world economy through trade, investment, financial markets, supply chains and commodity flows means that any protectionist shift will be particularly damaging .

But the real problem is that job losses are at the heart of the growing political crisis. The International Labour Organisation expects global unemployment to rise by around 30m this year compared with 2007, and by as much as 50m if the world economy turns desperately downward. In the US alone, more than 2.5m jobs were lost in the
four months from November 2008 to February this year. Unemployment is being driven, in part, by a collapse in industrial production, which has fallen by more than 10% year on year in most countries.

EUI makes 3 possible scenarios of the future of the global economy, they are  like this:

Scenario 1:  Our central forecast (60% probability)

Government stimulus stabilises the global financial system and restores economic growth in leading developed markets during 2010, albeit at lower levels than in recent years.

Scenario 2:     The main risk scenario (30% probability)

Stimulus fails, leading to continued asset price deflation and sustained contraction in the leading economiesóa depression persisting for some years.  The stubborn decline in global economic activity is punctuated by occasional
rallies that are taken as signs of recovery, but these quickly fade as the underlying downward trend reasserts itself. The prominent role of governments in propping up banks and reviving domestic demand leads to strong political
pressure for protectionism, effectively putting the process of globalisation into reverse.

Scenario 3: The alternative risk scenario (10% probability)

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless.
Economic upheaval sharply raises the risk of social unrest and violent protest.
The debt deflation cycle is already a global phenomenon, encompassing most of the developed and developing world. Heavily indebted economies that experienced housing bubbles, such as the US and the UK, Spain and Ireland,
are particularly vulnerable to deleveraging and asset price declines, and all the more so under our main risk scenario. But they are not alone in suffering the consequences.One lesson from the crisis is the extent to which globalisation
has increased interdependency.

Thus economies that at first sight may have appeared well placed owing to adequate savings rates and trade and current-account surpluses suffer most acutely from the collapse in global demand and trade. Large exporters such as Germany, Japan and China fall into this category.

During the credit boom, banks facing subdued growth in their domestic markets had often ventured into more risky areas. Thus German and Swiss banks are being weakened by write-downs on US mortgage-backed securities,
while Austrian banks are hit by high exposure to eastern Europe, and this intensifies under our main risk scenario. As such risky assets are written down, banks’ capital constraints curtail the availability of credit in their domestic
markets.

The following types of vulnerability in emerging markets are exposed:
•  category 1: countries where growth was driven by credit expansion and asset price appreciation;
•  category 2: countries geared to global growth;
•  category 3: countries with a commodity dependence.
Few emerging markets do not fall into one or more of these categories. Those most acutely affected are in category 1, including many central and east European countries, which were running large current-account deficits and face large external debt repayments. Category 2 encompasses much of Asia, given its dependence upon export-led growth. Category 3 takes in Latin America, the Middle East, Africa and Russia.

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