A Tough Year Ahead: Time to Consolidate and Focus on Reforms

A Tough Year Ahead: Time to Consolidate and Focus on Reforms

The latest World Economic Outlook (WEO), IMF’s flagship publication focuses on the global financial crisis and their impact on the real economy. It has revised downwards its forecasts made in July 2008 with the global economy now expected to grow only by 3.9% in 2008 and 3.0% in 2009 which officially makes for a global recession next year. GDP in advanced economies is expected to rise by an anemic 1.5% in 2008 and 0.5% in 2009. Emerging economies are expected to maintaining a growth of 6.9% in 2008 and a lower 6.1% in 2009. This is nearly two percentage points down from the previous two years when emerging economies had registered 8% economic growth with the world output rising by 5% in both 2006 and 2007. Chinese growth rate is expected to come down to 9.7 and 9.3% in 2008 and 2009, while India’s GDP is estimated to increase by nearly 8% and 7% in these two years. World trade according to WEO is still expected to achieve a positive growth of 5 and 4 % in these two years.

These numbers reveal a sharp and across the board slowing down of the global economy, largely as a result of the financial sector meltdown that we have witnessed since September 2008 when Lehman Brothers was allowed to collapse. The more worrying aspect of these forecasts is that they are probably already out of date and need to be revised downwards again. For starters, the World Bank has already forecast that world trade growth will be negative this year. From all the news coming out of the US, it is clear that it has been in recession since December 2007 already, which implies that WEO’s estimate of US growth of 1.6% in 2008 is overly optimistic. With house prices still declining, construction at a near stand still and unemployment numbers worsening with each successive week, it now seems that US economy could contract by as much as 5% in the fourth quarter of 2008. This will in all likelihood imply that the US economy will...