In 2008 the world economy took a sharp turn following the collapse of Lehman Brothers in September. Before that, though the impact of rising inflation rates had led to an increasing sense of deceleration—not just in the United States and other developed countries but also in resource-importing emerging economies like India, members of the Association of Southeast Asian Nations, and countries in Central and Eastern Europe—the overall decline was tempered by the ongoing growth in resource-exporting economies, notably Brazil, Russia, and countries in the Middle East. But in the wake of the "Lehman shock," leverage was contracted, moves to cut exposure to risk assets contributed to declines in stock prices, and banks in countries around the world found themselves facing capital inadequacy regardless of whether they held products related to the securitization of subprime loans; meanwhile, the contraction of credit caused demand to shrink through a number of routes of causation, including the drying up of lending to corporations and of trade finance. On top of that, falling prices for resources produced slowdowns in the previously booming resource-exporting economies, leaving the world with no growth locomotives; the result was a simultaneous global downturn.
The subprime mortgage problem developed into a broad financial crisis with the collapse of Lehman Brothers, and the resulting losses recorded by financial institutions around the world have already topped $1 trillion. The writing off of losses from subprime lending has been progressing, but the process of dealing with the additional round of losses caused by the simultaneous global downturn will get into full swing in 2009, and this will hang over the global economy as an additional downside risk.
Following the Lehman shock, countries around the world have acted quickly to implement massive measures for financial stabilization and economic stimulus, and they have also moved together to cut interest rates repeatedly and sharply; they have been seeking to avoid the mistakes made when the Great Depression hit at the end of the 1920s and when Japan experienced a financial crisis in the 1990s. Though we will need to watch out for a possible further decline in demand this year due to a vicious cycle of deteriorating business conditions and credit contraction, we expect that the effects of the macroeconomic countermeasures will gradually make themselves felt and that the world economy will emerge from the worst of the financial crisis during the first half of the year. During the second half, though some weakness will remain, particularly among the developed countries, the world should be able to head toward a recovery powered by demand from China and other emerging economies.
The developed economies are likely to feel the lingering aftereffects of the financial crisis and to see domestic demand remaining sluggish as a result of weak performance in major industries like automobiles and electrical machinery, combined with the loss of jobs and other negative developments; as a result, deflationary concerns will probably persist, and these countries are forecast to experience negative growth en masse in 2009 for the first time since the end of World War II.
In the United States, hopes for implementation of a "green New Deal" by the incoming Obama administration are contributing to expectations that the economy will bottom out around the middle of 2009. House prices, however, will probably not hit bottom until the second half or later, and consumer spending is likely to lag, meaning that the recovery will lack dynamism; fears of a prolonged recession are liable to persist into the second half, and the economy is expected to remain basically flat. In Europe too the recovery is likely to be anemic; though exports to the emerging economies in places like Asia and the Middle East will provide some support, the overall upturn will be delayed, with the process of adjustment in the housing market continuing.
In the emerging economies and elsewhere in the developing world, demand should pick up again as inflation recedes, and the deterioration in external payment balances will be braked; as a result they are expected overall to regain their recovery momentum sooner than the developed countries. In Central and Eastern Europe, however, the aftereffects of the financial crisis are likely to linger; the emerging countries there will be slow to improve their payment balances and will remain heavily dependent on funds from abroad. Their recoveries will thus lag behind those in Asian emerging countries, which have the cushion of ample foreign currency reserves.
China is mobilizing all its monetary and fiscal policy tools in order to achieve 8% growth, and it is likely to record a robust expansion powered by infrastructure-related demand.
Risks that could cause the global recovery to come later than expected include the potential persistence of the financial crisis, which could result in ongoing systemic instability, greater weakening of the dollar, and shrinkage of the pool of suppliers of risk capital. We will also need to stay on the lookout against the possible heightening of geopolitical risks.
