International Economic Update

Economies Still Contracting, Gradual Recovery Expected in 2010
May 5, 2009

The global economy continues to slow. The world's largest economies are seeing their sharpest contractions in several decades, and many developing and emerging markets that showed resilience until late last year are now in decline. First quarter 2009 GDP growth numbers were dismal, and a further drop is expected for the remainder of this year (Chart 1). Contributing to the deterioration are the prolonged global demand slump, the fall in asset prices and wealth, and the continued crunch in trade and investment financing. Among the consequences of the protracted decline are weakened labor conditions and an uptick in protectionism. Efforts to shore up the economy include aggressive fiscal stimulus packages and the continued easing of monetary policies.

Weakening Global Demand
International trade and industrial production in both advanced and emerging markets have taken a nosedive. Export-oriented economies have been hardest hit by the weakening of global demand. In Japan, there is broad-based decline in industrial production (Chart 2), and exports plunged by a record 44.5 percent (year-over-year) in March. In China, exports plummeted 41.1 percent in February from a year earlier, the fourth straight month of decline. In the euro area, industrial production fell by 15.5 percent in February from the previous year. The Organization for Economic Cooperation and Development (OECD) estimates that export growth will remain in negative territory through the end of the year and recover in 2010 (Chart 3).

Deteriorating Labor Market Conditions
Unemployment rates in both advanced and developing nations have increased sharply in recent months. The OECD estimates that the number of unemployed will increase by 25 million people in its member countries in 2009. So far, the worst-affected nations include Spain and Ireland, which saw unemployment rates increase year-over-year by 6 and 5 percentage points, respectively, in February (Chart 4). In the U.S., the unemployment rate edged up to 8.5 percent in March, its highest measured rate since 1983. China has already lost about 10 million jobs in this recession.

Fears of Protectionism
In spite of the growing international coordination of monetary policy, financial-sector recapitalization, and pledges from world leaders to avoid implementing trade barriers, protectionism has increased since fourth quarter 2008. World leaders are facing pressure to sustain growth and credit flows and contain job losses amid worsening economic conditions. India, Indonesia, Vietnam, Ukraine and Russia are among those that have raised import tariffs or have implemented restrictions such as import licensing or quotas. According to the World Bank, governments have implemented 47 trade-restricting measures, half of which have been put in place by developing countries.

Government Stimulus
Financial market conditions remain under stress despite wide-ranging policy measures to provide additional credit and reduce risks. The impact of the stimulus packages on GDP growth of individual countries depends on their size, targeted sectors and the time lags involved in their implementation. As of April, the International Monetary Fund (IMF) estimates that fiscal stimulus by the 20 most-industrialized nations will amount to 1.5 percent of global GDP in 2009 and 1.1 percent in 2010. Saudi Arabia, China, Malaysia, Mexico and the U.S. are some of the countries with fiscal stimulus packages over 5 percent of their national GDP (Chart 5).[1]

Outlook Remains Uncertain
The overall outlook for the world economy is uncertain. In its latest World Economic Outlook report, the IMF sharply downgraded its projections for 2009 growth, citing continued weakness in global financial markets. Global economic activity is expected to contract by 1.3 percent in 2009 before experiencing a modest recovery in 2010. Volume of world trade is predicted to contract by 11 percent in 2009. On the upside, extensive monetary and fiscal stimuli will help shore up confidence in the markets and boost demand. The downside is that an emergence and intensification of protectionist measures may hinder growth.

—Janet Koech

  1. GDP for 2009 is based on IMF's estimates for 2009 growth contained in the April 2009 World Economic Outlook report. The stimulus packages are the total amounts announced by the specific countries as of March 2009. In April, Japan announced an additional stimulus package of $154 billion, bringing its total stimulus share of 2009 GDP to 5.3 percent.
About the Author

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


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