Oxford Economics have produced a fascinating, and concerning, report on the estimated global gross domestic product (GDP) for 2009/2010. It gives a timeline for the current credit crunch and the events to date.
The researchers estimate the final losses of the banking sector are around US$1.9 trillion, equivalent to about 6.5% of US and European GDP. The response over recent months has been to implement a series of bank rescue packages which total almost US$3 trillion. The report catalogues these:
"In the US the US$700bn Paulson Plan started with US$250 billion recapitalisation of the nine largest banks. In Europe over €1 trillion has been made available in the Eurozone to guarantee interbank lending with another €200bn for recapitalisation of banks. The UK bailout involves nationalising or part-nationalising leading banks at a cost of £50bn, with additional funding of as much as £325bn available in the form of loans and guarantees."
A further monetary measure has been to reduce interest rates which is good for borrowers but not for investors. In the US interest rates are 0 - 0.25%; Japan 0.1%, UK 2% and the ECB has cut rates to 2.5%. It is possible that if inflation increases rates will be further cut where possible. However this does not mean that businesses or individuals can obtain finance at those rates. The researchers conclude that lower interest rates usually take some 12-18 months to have an impact so other measures will also need to be taken.
World GDP is estimated to contract by 0.4% in 2009. Many countries have announced, or are considering, measures to increase their GDP - China by 14%; US by 7%; Japan 4.5% and Europe around 1.5%.
The report lists the following as key factors that will impact on monetary policy:
- Weaker consumer spending - the report forecasts a reduction in personal spedning in 2009 of 1.2% in the Eurozone, 1.3% in the US and 2.3% in the UK.
- Tougher economic environment for businesses - caused by reducing consumer demand and the impact of interest rates and borrowing costs.
- Government finances - budget deficits and increased public debt will be a key issue as governments seek to spend their way out of recession and meet the financial needs of growing unemployment and the loss of tax income.
- Lower inflation and interest rates - driven by a global slow down and lower commodity prices. Deflation is possible in some economies.
- Exchange rates - will only help UK exporters when other economies seek to buy our products - if consumer spending is reduced in those countries our exports will also be reduced.
- Weaker world trade - forecast to contract by around 1% in 2009 - reinforcing point 5 -
- Emerging markets slowdown - many emerging economies have been hit by the issues already described and by external capital withdrawal. The IMF are seeking to fund some countries that have seen a severe impact from capital withdrawal including Hungary, Ukraine, Pakistan.
The report concludes that the economies of the US, the Eurozone, Japan and the UK are forecast to contract by around 2% in 2009. China is forecast to grow by about 7% in 2009, its lowest since 1990, India about 5% and Russia will slow dramatically from around 6% this year to little over 1%. Latin America is expected to grow by only about 1% in 2009 . The economies are forecast to improve in 2010 and move into positive growth for all regions.
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