The world economic outlook for 2009
2.1 The world economic growth rate is expected to be in the range of -0.5 and 0.5 percent, the lowest rate since World War II. Major advanced countries and high export-dependent economies are likely to experience with economic recession while other developing and emerging economies tends to slowdown noticeably in tandem with the contraction of global manufacturing production bring about by a reduction in world trade volume. Commodity prices are expected to decline due to rising excess production capacity and a reduction of demand both in domestic and foreign markets. Meanwhile, financial institutions are likely to be cautious in their lending practices. Deteriorating consumer confidences and business sentiments are likely to limit the efficiency of easing monetary and fiscal policy implementation and thus the management of economic stability will be critical issues. The impacts of economic stimulus packages that launched in late 2008 and early 2009 by various countries are likely to bring back the world economy to begin its recovering path in the fourth quarter of 2009 under the condition that financial strain and market sentiments are improved.
The economy of major industrialized countries is projected to contract by 2.0 — 2.8 percent. The general economic conditions in the last quarter of 2008 and in January of 2009 indicated that the corrections of the real economy are stronger than previously expected. The rising jobless rate tends to form a roll-back momentum and delay economic recovery in 2009. Although, an aggressive liquidity injection and deposit insurance schemes in the US and other major countries have helped reduce shortrun financial uncertainty, sentiments in financial and capital markets remained fragile. Spreads in funding market remained high as the process of financial loss recognition remained incomplete. Financial efficiency and long-term solvency of financial institutions, the fundamental factors for market sentiments and for the working of economy, has yet adequately improved. Therefore, financial strain remained acute in advanced economies while export expansion will be limited by broad-based global slowdown. In addition, rising jobless rate are eroding consumer confidences and likely to aggravate the worsening housing market and credit condition while asset price reduction lowering real purchasing power. Against this backdrop, the economy of the US, Eurozone and UK are likely to contract by 2.3 to 1.6 percent, 2.0 to 2.5 percent and 2.8 to 3.2 percent respectively which will pull down the Japanese economy to a contraction of 2.6 to 3 percent.
- Growth in developing and emerging economies is expected to slow down sharply in 2009. In particular, the countries with high exposure to global production chain and high dependent on export and foreign capital are likely to slip into recession or experience with a serious slowdown with difficulties in stability management. This is because financial strain and economic contraction in major advanced economies will result in; (i) The reduction of world trade volume of around 2.8 percent. As major industrialized economies account for around 50 percent in global GDP, their demand reduction would reduce global trade substantially as seen in the fourth quarter of 2008. (ii) The decline in oil and primary commodity prices in response to the contraction of global demand which is likely to seriously affect the oil and primary commodity exporting countries. (iii) The decline in capital flow, both in terms of FDI and stock market investment, to developing and emerging economies due to the rising capital demand to compensate financial losses and budget deficit in advanced economies, the fragile sentiments in financial system and the lacking of confidence on global economic prospects, and the rising demand for safe assets. (iv) The US dollar is likely to appreciate against other major currencies due to the deteriorating economic condition in other major economies. This excluded Japanese Yen, as Yen carry trade will result in capital inflow while FDI outflow tends to slow down. Against this backdrop, growth rate in China India and Brazil are projected to slow down to 6.7 percent, 5.1 percent and 1.8 percent in 2009, compare to that of 9.1 percent, 7.3 percent and 5.8 percent in 2008. The Newly Industrialized economies such as South Korea Singapore are forecasted to contract by 3.5 percent and 3.8 percent respectively. Meanwhile, ASEAN countries are expected to slow down sharply with the rate of growth of 1.5 percent 3.5 percent, 2.1 percent and 4.8 percent for Malaysia Indonesia Philippine and Vietnam, compare to that of 5.0 percent 6.0 percent, 4.6 percent and 6.3 percent in 2008. The economy of Middle East region is expected to decelerate from 6.1 percent in 2008 to 4.0 percent in 2009 due to the reduction in oil prices and growth for African economy is likely to soften from 5.2 percent to 3.4 due to the decline in primary commodity price and capital inflow.
- The world economy is expected to move to recovery trajectory in Q4 of 2009 and likely to grow between 2-3 percent in 2010. The timing for economic recovery is likely to be delayed by in high and rising global unemployment rate that are generated by economic contraction in advanced economies and broader base slowdown in other developing and emerging economies. Therefore, in the best case scenario, the global economy is projected to start recovering path in the fourth quarter of 2009 due to supportive coordinated measures that are including (i) The low policy rate of interest (ii) Although, financial system in advanced countries has yet improved adequately and the efficiency of standard interest rate policy is likely to be eroded by steady disinflation, the working of real economy will be supported by aggressive credit easing policy that aimed to lower cost of credit, to increase the credit accessibility of households and firms, to reduce the insolvency risks of financial institution and to finance fiscal deficit and stimulus measures. This credit easing policy is likely to be more emphasized in 2009 (iii) The worldwide coordinated fiscal stimulus packages.
In addition to low policy rate and the aggressive credit easing policy, the US recovery in the second half of 2009 will be supported by the second phase of Troubled Asset Relief Program (TARP) of 350 billion USD and the economic stimulus package of 787 billion USD. Meanwhile, the central bank of Eurozone and Japan are expected to be more emphasize on credit easing measure in order to normalize financial conditions and Japan and Eurozone recovery will be supported by stimulus package of 250 and 87 billion USD respectively. Meanwhile the central bank of Eurozone, Japan and UK is expected to emphasize on credit asing monetary policy in an attempt to normalize their financial conditions and to finance budget deficit. Similarly to developing and emerging economies that are increasingly reliance on fiscal stimulus measures. In articular, China announced stimulus measure of 585 billion USD while other countries such as Singapore, Malaysia and Vietnam announced their package of 13.2, 7.2 and 0.8 billion USD respectively. Most of stimulus packages encompassed tax rebate, an increase in tax allowances, tax privileges for business sectors in particular for SMEs), government spending on development projects, transfer for lowincome group as well as compensations for unemployed workers and subsidy for firms to retain job position.
However, analysts around the globe increasingly concerns that the world economic recovery will be delayed. The persistence of expectations that the global economy will experience with a prolonged global economic contraction throughout 2009 and start its recovering path in 2010 is due to following risk factors:
- All countries faced with problems high and rising-unemployment that lowered purchasing power. The worsening financial and economic condition resulted in high and rising jobless rate which caused household and business debts in many countries to increase and wealth to decline. Income growth and confidence would remain weak , and sustainability of the economic recovery becomes a concern without lasting and ever rising fiscal stimulus. Therefore, the loose fiscal and monetary policy will be less effective as the psychological effects of an approximately 50 percent reduction in securities and housing prices eroded consumers’ confidence and real Purchasing power.
- The contagious impacts of financial problem on real economic activities resulted in the shut down of some businesses in manufacturing and service sectors. This situation causes a vicious circle which develop through this related dimensions of problems; (i) Unemployment problem (ii) Non-performing loans forms a roll-back impact to the financial sector and (iii) Excess supply together with the sluggish demand condition encourage business sector to deploy price-competing strategy (price war) and could potentially lead to deflation. This is a situation in which debtors faced with rising real debt burden and lowering debt-service capability. In addition, price war could encourage some countries to resort to trade protection.
Most countries have cut their policy rate to a historical lowest level. However, financial strain remained persist as financial institutions are more cautious in their credit extension. At the same time, further implementing of expansionary fiscal policy will be and less flexible in come countries due to high and rising deficit in fiscal balance.
- Many countries face with structural problem both poverty and competitiveness problems. Therefore, there exists fiscal burden in these countries to restore their economic and social foundation. In such a situation, the difficulties in budget management tend to increase and encourage the government to opt for foreign loans. Some countries turned to loans from international organizations.
- The impacts of financial crisis on trade and investment in developed and developing countries reinforce to each others in the way to widen and amplify scale of the crisis.
2.2 Oil price trend in 2009: Oil price trends downward to an average 45- 55 USD per barrel.
(1) Average Dubai crude oil price in 2009 is expected to be at around 45-50 US dollar per barrel, lower than an average of 93.65 US dollar per barrel in 2005. In January 2009, an average Dubai crude oil price was at 44.12 US dollar per barrel before slightly increased to 45.55 US dollar per barrel in Febuary10, 2009. The global economic recession is expected to bottom out in the first half of 2009 and, facilitated by coordinated stimulus measures in the US, EU, Japan, and Asian countries, pick up in the second half of the year. Together with oil continued expansion of oil demand from China, Middle East and Latin America, global economic recovery is likely to raise global oil demand.
(2) However, the recovery of global economy in 2009 remained uncertain. Up to date, the risk of prolonged global economic contraction remained persist. Therefore, most analysts expected that the average crude oil price in 2009 will be lower than 50 US dollar. According to the report from Energy Information Administration (EIA) in February 2009, WTI crude oil price in 2009 is forecasted at 43.0 US dollar per barrel, lower than average price of 99.69 US dollar per barrel in 2008. Meanwhile, IMF and Goldman Sachs forecasted that average WTI crude oil price in 2009 will be at 50 US dollar per. barrel. In all, the supporting factors for low oil price in 2009 are including;
- Consumption demand decline due to global economic recession. According to EIA’s oil market situation report on February, world oil consumption demand in 2009 is forecasted to be at around 84.70 million barrels per day, decreased from consumption demand in 2007 (which was at 85.87 million barrels per day) by 1.17 million barrels per day. Consumption demand in OECD countries is expected to decline from 47.6 million barrels per day to 46.08 million barrels per day due mainly to the reduction in US consumption demand. Nevertheless, the expansion in consumption demand from China, Middle East, and Latin America, is likely to raise consumption demand in non- OECD countries from 38.18 millions barrels per day to 38.63 million barrels per day.
- The impact of production reduction on oil price is weaker than that of a sharp reduction in consumption demand during the period of sharp and broad-based economic contraction. Although, the OPEC cut oil production on the 17th December 2008 by 2 million barrels per day (the largest production cut since 1992) due to the reduction of oil production in Saudi Arabia to reduce supply overhang, the demand declined at a faster pace. According to EIA report, oil production in 2009 is expected to be at 84.43 million barrels per day, lower than that of 85.49 million barrels per day in 2008. In the first quarter of 2009, OPEC oil production is expected to decline by 1.6 million barrels per day and pull down oil production to the 5-years lowest level of 29.1 million barrels per day as Saudi Arabia cut its oil production. In 2009 OPEC’s oil production is expected to be at 34.54 million barrels, lower than that of 35.75 million barrels per day in 2008. Meanwhile, non-OPEC oil production tends to increase by around 150,000 barrels per day in 2009. However, there are downside risks for this projection in particular the delay in drilling projects caused by financial crisis and unfavorable oil price for production expansion as well as tight credit market condition.
- The incentive for oil speculation is expected to decline due to; (i) An enforcement of “Stop Excessive Energy Speculation Act of 2008” is expected to reduce speculation in oil market. (2) The operation of U.S. Commodity Futures Trading Commission (CFTC) is expected to close loophole of anti-speculative rules of futures trading market (3) The process of loss recognition in derivative and futures trading market has yet incomplete.