Deloitte economists offer more optimistic persective in Global Economic Outlook Q4 report

Written by five Deloitte global economists, it predicts that, although developed country economies will continue their serious downturns, the massive infusion of government money should restore activity to the credit markets and set the stage for recovery. Emerging countries will feel the negative effects of this downturn.

The report looks at the historical precedent of financial crises in Norway, Finland, Sweden, and Japan in the 1990s, as well as the United States during the savings and loan crisis. It suggests that bank recapitalization can be beneficial to economies and that the financial burden on taxpayers is not necessarily onerous. Yet the report also notes that economic downturns triggered by financial crises tend to be deeper and longer than those that start for other reasons.

"Unlike some past financial crises, this one resulted in a rapid and massive governmental response on both sides of the Atlantic," said Dr. Ira Kalish, Director of Global Economics, Deloitte Research. "Thus, there are reasons we can be cautiously optimistic about the medium-term outlook for the global economy."

The report offers a long-term view, suggesting impacts in multiple business sectors. "The credit crunch is part of a long-term restructuring of the economy," said Dr. Kalish. "The result will see a shift in the U.S. economy away from a consumer-driven import base to an export-based economy. Asia on the other hand, will develop as more consumer-based economies. This creates opportunities and challenges for business across industry sectors."

"In the United States, recapitalization of banks will help to revive credit market activity," continued Dr. Kalish. "Eurozone banking consolidation will have a positive long-term impact on European capital market efficiency. Finally, the emerging economies of Russia, India, and China, while slowing, will remain important drivers of global growth.

"Once economic recovery resumes, inflation will be a significant challenge in many countries, with some like India and China already walking a tight rope. The longer it takes for countries like these to address inflation, the more difficult it will be to suppress future inflationary pressures."

Omar Fahoum, Chairman and Chief Executive of Deloitte & Touche Middle East, commented on the findings of the study for the Middle East by saying: "GCC currencies are effectively pegged to the U.S. dollar not to make their currencies competitive but to reduce volatility in their export receipts; their single biggest export, oil, is priced in U.S. dollars. When the price of oil went up, increased income resulted in asset bubbles especially in the real estate market. Saudi Arabia, U.A.E., Qatar, and Kuwait all have asset bubbles as well as high levels of inflation. The question now is whether countries that currently peg to the dollar will move fully to the Euro or to a basket where the Euro has a substantial weight. The former is highly unlikely because news of the demise of the U.S. dollar was premature as we are currently witnessing, and countries would have had to revalue their currencies causing their competitiveness to be hit. GCC countries will probably remain pegged solely to the U.S. dollar because they have the money to essentially buy themselves out of the situation".

Offering a closer look at the impact of the volatile price of oil, Dr. Kalish said, "A drop in oil price could partially offset the negative impact of the credit crisis. However, relatively elevated oil prices will negatively impact production." The OECD predicts this impact on growth to be greater in the U.S. due to its high reliance on energy and weaker currency (at $120.00 per barrel, -0.21- -0.51 and -0.06- -0.2 percentage points in the United States and Euro Zone growth respectively).

Country findings:

• Brazil faces a slowdown in growth due to lower commodity prices and reduced demand for manufactured exports. The country will probably resume moderate growth once the global economy eventually recovers.
• In China, the outlook is hazy, with GDP slowing and the Chinese government balancing as best it can both rising inflation and slowing growth.
• India faces slower growth. Longer term, the outlook will depend on the government's ability to invest in infrastructure.
• In Japan, our best guess is that the downturn will be short-lived and the recovery will be relatively robust.
• Russia faces the perception of risk on the part of foreign investors. Excessive dependence on oil is but one of several factors that pose future problems for Russia.

"This report is meant to provide a strategic perspective about the economy for the business community," explained Dr. Kalish. "In the current environment, it is important for companies in both developed and emerging countries to understand the risks they face and the potential impact on their business strategies."