Media release - 15 October 2009 

 Media release - 15 October 2009 

More signs of recovery in the world economy

There are further signs of recovery in the global economy as the International Monetary Fund (IMF) revises up its forecast for global GDP and the US housing market – which precipitated the global financial crisis – stabilises, states the October edition of EFIC’s newsletter, World Risk Developments.

“The world economy has stabilised and will begin to recover towards the end of 2009, according to the most recent IMF forecasts,” says Dougal Crawford, Senior Economist at EFIC.

“In annual terms, the IMF predicts that global GDP will contract by 2.3% in 2009, before rising by 2.3% in 2010. This compares to their July forecast of a 2.6% fall in 2009 and 1.7% increase in 2010,” says Crawford.

Aggressive public policy in both advanced and developing countries has played a significant part in the recovery.

“Clearly, public policy has supported output, limited the collapse in the global financial system and boosted confidence,” says Crawford.

But growth will be constrained by the private sectors in the major industrialised economies repairing their balance sheets. High unemployment will also weigh on the recovery.

Non-Japan Asia is expected to lead the recovery, fuelled by policy stimulus and a rebounding manufacturing cycle. For example, Chinese GDP is expected to increase by 8.5% in 2009 and 9% in 2010, which is near pre-crisis rates.

Growth in advanced economies will be significantly weaker, well below trend. The recovery in emerging Europe (including Russia) is also likely to be slow, especially for countries hit by financial sector turmoil and the decline in international capital flows.

In addition to the IMF’s revised forecasts, a number of indicators suggest that the US housing market has reached its lowest point and may begin to recover.

“New housing starts have risen in recent months, house prices appear to be stabilising after large falls and the overhang of the stock of unsold new houses is also unwinding relatively quickly,” explains Crawford.

However, these ‘green shoots’ should be kept in perspective, he warns. Construction activity remains at a very low level and housing starts are just above their lowest level in the post-war period, at only 40% of the 20-year average of around 1.5 million starts a year. Homebuilder confidence is also still well below levels that indicate ‘good conditions’.

“Housing activity remains very subdued and any recovery will be constrained by high unemployment, households focusing on rebuilding savings and a large stock of unsold existing homes,” Crawford says.

In other stories, the newsletter looks at the economic effect of the recent natural disasters in the Asia-Pacific, a fall in the Baltic Dry Index which defies other positive economic data, and how the spread of Indonesian over Philippine bonds has vanished due to Indonesia’s relative economic and political stability.