Dec 22 - 28, 2008

Once, there was a time when the US economy was considered most powerful economy of the world. But now, the locomotive of growth for 60 years is dragging the world economy toward the abyss. Analysts believe that the crisis appears in history as the most serous since the Great Depression of 1930s.

Until recently, the projected GDP growth rate for developing countries was around 6.4 percent per annum. After the crisis, this growth rate has been revised. Now the World Bank has forecasted a meager growth rate of 4.5% for the developing countries. The bank further said that the economies of high-income countries, many of which are already in recession, will shrink by 0.1% during the coming year.

In late October 2008, about 25,000 billion US dollars went up in smoke in the global stock market tumble. According to the IMF, owing to the financial crisis, the U.S economic growth may drop to 0.1% in 2009. The U.S. bank announced the elimination of 52,000 positions. Despite the aid of 25 billion dollars granted by the Federal Government under the stabilization plan of U.S. financial system, the collapse is continuing. The U.S economy is sinking deeper into the economic doldrums, and is likely to stay there for a long time.

While the United States and the EU are heading towards a recession, the forecast is also deteriorating rapidly for many emerging economies. For the first time in several years, Latin America is expected to have a deficit in the balance of payments. Moreover, GDP growth for the whole region could also fall in 2009. In Mexico, remittances of earnings from expatriates have already decreased and the central bank is being forced to support the Mexican Peso. Foreign exchange reserves have shrunk immensely. The Brazilian stock market index registered a substantial fall and major investment projects have been postponed.

China, the steam engine of the world economy has begun to stumble. The tremors of the financial crisis are now being felt in China and experts have forecast a lower GDP growth rate for the coming years. In addition, exports of Chinese goods to the United States, which accounts 20% of its total exports, have been projected below 8% for 2009.

Likewise, in the Asia Pacific region there is evidence of declining economic growth. For instance the annual GDP growth in India is expected to slow to about 7% for the same period. Even if these growth rates remain favorable, they can cause serious consequences for both China and India and the region as a whole. Japan is threatened with a return of deflation from mid-2009. Asian internal trade is likely to deteriorate because of declining demand from China.

The economic out look for Germany is also not very promising. Germany, the first euro-area economy will experience a recession for the whole of 2009, with GDP declining by 0.8%. The international financial crisis may also push France into recession in 2009, with a GDP decline of 0.4%, significantly widening the public deficit. Furthermore the UK will also sink into recession next year. Taken together, the 30 OECD countries may experience a recession of 0.4% next year, with a recovery of 1.5% in 2010, according to one estimate.

The economic surroundings of Ukraine and Hungry are also horrendous. Belarus has also applied for finance from the IMF. Turkey is seriously considering further intervention of the international institution. Economic growth is expected to fall to 3%. In these circumstances, it will be harder to bridge the growing deficit in the balance of payments. The repatriation of income from abroad, grants and private funding, including foreign direct investment, will be hit hard in several African countries.

The grim economic outlook has led to an unprecedented drop in commodities prices. In July 2008, the price of crude oil was US $147 a barrel and on the 15th November it was sold for $58 and at throwaway price recently of below $40. The drastic cuts in production (-1.5 million barrels per day) announced by the OPEC countries have failed to reverse the trend. This is a real challenge for countries like Ecuador, Iran, Venezuela, and Russia who base their policies on high oil prices.

The economic crisis is also felt in the Middle East. The stock markets have fallen; regional banks are facing liquidity withdrawing pressure and the real estate market in Dubai is plummeting.

Situation in some countries like Pakistan and emerging countries of Europe is devastating. Pakistan faces a severe economic crisis after a series of deteriorating internal and external situations. In the context of growing political insecurity, the economic climate of Pakistan was deteriorated when soaring oil prices led to double-digit inflation. Faced with massive outflows of capital leading to rapid decline in foreign exchange reserves and fall of the rupee, the economic prospect for Pakistan seems very bleak. Couple of days ago the IMF has granted loan for Pakistan but the outcomes have yet to be seen.

(The writer is a research fellow at Shanghai University of Finance and Economics).