Canada's State of Trade: Trade and Investment Update – 2009

I. Global Economic Performance

Overview and Global Prospects

Over the four-year period 2004–2007, the global economy boomed. Global real gross domestic product (GDP) rose at an average of almost 5 percent a year, its highest sustained rate since the early 1970s. In early 2008, the liquidity crisis that had begun in late 2007 deepened, and then entered a tumultuous new phase in September 2008, leading to an unprecedented contraction of economic activity and trade. Industrial production and merchandise trade plummeted in the fourth quarter of 2008 and has continued to fall rapidly in early 2009 across both advanced and emerging economies. Overall, global GDP is estimated to have contracted by 6.25 percent on an annualized basis in the fourth quarter of 20081 (a swing from 4 percent growth one year earlier) and to have fallen almost as fast in the first quarter of 2009. For 2008 as a whole, global economic growth slowed by over a third, from 5.2 percent in 2007 to 3.2 percent last year.

All economies around the world have been seriously affected, although the impact of the downturn has varied. The advanced economies experienced an unprecedented 7.5 percent decline in the fourth quarter of 2008, and most are now suffering deep recessions. While the U.S. economy has suffered from intensified financial strains and the continued fall in the housing sector, western Europe and the more advanced economies in Asia have been hit hard by the collapse in trade as well as by rising financial problems of their own and housing corrections in some national markets.

Emerging economies too have suffered badly and in the aggregate contracted 4.0 percent in the fourth quarter. The damage has been inflicted through both financial and trade channels. Activity in east Asian economies with heavy reliance on manufacturing exports has fallen sharply, although the downturns in China and India have been somewhat muted given the lower shares of their export sectors in domestic production, more resilient domestic demand and, in the case of China, powerful fiscal stimulus. Emerging Europe and the Commonwealth of Independent States (CIS)2 have been hit very hard because of heavy dependence on external financing as well as on manufacturing exports and, for the CIS, commodity exports. Countries in Africa, Latin America, and the Middle East have suffered from plummeting commodity prices as well as financial strains and weak export demand.

Assuming vigorous macroeconomic policy support and anticipating a moderation in the rate of contraction from the second quarter of 2009 onward, global activity is now projected to decline 1.3 percent in 2009 (Table 1-1). By any measure, this downturn represents by far the deepest global recession since the Great Depression.3 Moreover, all corners of the globe are being affected: output per capita is projected to decline in countries representing three quarters of the global economy, and growth in virtually all countries has decelerated sharply from rates observed in 2003–07. Growth is projected to re-emerge in 2010, but at 1.9 percent would still be well below potential.

Table 1-1
Real GDP Growth in Selected Economies (2005-2008 and forecast for 2009)
 20052006200720082009
World4.5%5.1%5.2%3.2%-1.3%
Advanced Economies2.6%3.0%2.7%0.9%-3.8%
Canada2.9%3.1%2.7%0.5%-2.5%
United States2.9%2.8%2.0%1.1%-2.8%
United Kingdom2.1%2.8%3.0%0.7%-4.1%
Japan1.9%2.0%2.4%-0.6%-6.2%
Euro Area1.7%2.9%2.7%0.9%-4.2%
of which France1.9%2.4%2.1%0.7%-3.0%
of which Germany0.8%3.0%2.5%1.3%-5.6%
of which Italy0.7%2.0%1.6%-1.0%-4.0%
Developing Economies7.1%8.0%8.3%6.1%1.6%
China10.4%11.6%13.0%9.0%6.5%
India9.2%9.8%9.3%7.3%4.5%
Russia6.4%7.7%8.1%5.6%-6.0%
Brazil3.2%4.0%5.7%5.1%-1.3%
Mexico3.2%5.1%3.3%1.3%-3.7%
ASEAN-5
Indonesia5.7%5.5%6.3%6.1%2.5%
Malaysia5.3%5.8%6.3%4.6%-3.5%
Philippines5.0%5.4%7.2%4.6%0.0%
Thailand4.6%5.2%4.9%2.6%-3.0%
Vietnam8.4%8.2%8.5%6.2%3.3%
NIEs
Hong Kong7.1%7.0%6.4%2.5%-4.5%
Korea4.0%5.2%5.1%2.2%-4.0%
Singapore7.3%8.4%7.8%1.1%-10.0%
Taiwan4.2%4.8%5.7%0.1%-7.5%

Source: IMF World Economic Outlook database, April 2009.

United States

Real GDP increased 1.1 percent in 2008, compared with an increase of 2.0 percent in 2007. The slowdown in real GDP in 2008 primarily reflected a sharp deceleration in personal consumption expenditures, a downturn in non-residential fixed investment, in particular for equipment and software, and decelerations in exports and in state and local government spending. These were partly offset by a sharp downturn in imports, an acceleration in federal government spending, and a smaller decrease in private inventory investment.

For the year as a whole, consumer spending decelerated sharply, rising only 0.2 percent after increasing 2.8 percent in 2007. Spending for durable goods turned down, mainly reflecting a downturn in motor vehicles and parts. Spending for nondurable goods also turned down and was widespread. Spending for services slowed and, except for medical care, was also widespread. Non-residential fixed investment slowed, increasing only 1.6 percent after having increased 4.9 percent the previous year. The deceleration reflected a contraction in equipment and software. Residential investment decreased throughout 2008—the third consecutive year of declines—subtracting 0.93 percentage points from real GDP growth. Net exports contributed 1.40 percentage points to real GDP growth in 2008 after contributing 0.58 percentage points in 2007. Exports of both goods and services slowed in 2008. Imports of goods turned down, adding 0.65 percentage points to real GDP growth in 2008 after subtracting 0.25 percentage points in 2007. Imports of services slowed. Government spending picked up, reflecting an acceleration in national defence spending and an upturn in non-defence spending, while state and local government spending slowed.

Performance was weak over much of the first half of 2008, before turning negative in the second half of the year. Real GDP fell 0.5 percent in the third quarter and then plunged 6.3 percent in the fourth quarter as the full force of the recession took hold. This decline was the largest since the first quarter of 1982.

For the final quarter of 2008, consumer spending registered the largest decrease since the second quarter of 1980, shaving 3.0 percentage points off real GDP growth. U.S. households have been hit by large financial and housing wealth losses, lower earnings prospects, and elevated uncertainty about job security, all of which have driven consumer confidence to record lows and have depressed consumption. Non-residential fixed investment recorded its largest decrease since the first quarter of 1975, falling 21.7 percent while residential investment decreased 22.8 percent over the quarter after having decreased 16.0 percent the previous quarter. It was the twelfth consecutive quarter of decline for residential fixed investment.

Exports also turned down sharply, the first decrease since the second quarter of 2003 and the largest decrease since the fourth quarter of 1971. The downturn reflected widespread downturns in exports of goods. Exports of services also fell over the quarter. The downturn in exports of goods reflected large downturns in capital goods, industrial supplies and materials, automotive vehicles and parts, and non-automotive consumer goods. Imports decreased sharply in the fourth quarter, down 17.5 percent compared to a 3.5 percent decline in the third quarter. It was the fifth consecutive quarterly decline in imports and the largest decrease since the third quarter of 1980. Federal government spending slowed over the quarter, reflecting a deceleration in national defence spending that was partly offset by an acceleration in federal non-defence spending.

Recent data suggest another substantial drop in economic activity in the first quarter of 2009. Although there have been some tentative signs of improving business sentiment and firming consumer demand, employment has continued to fall rapidly—5.1 million jobs have been lost since December 2007—pushing the unemployment rate to 8.5 percent in March 2009. Monetary policy was eased quickly in response to deteriorating economic conditions, and policy rates are now close to zero.

The economy is now projected to contract by 2.8 percent in 2009. The rate of decline is expected to moderate in the second quarter and beyond as fiscal easing supports consumer demand. The U.S. economy is projected to start recovering by the middle of 2010, contingent on fiscal stimulus (equivalent to about 5 percent of GDP) over 2009–11, a continued easy monetary policy stance, as well as on measures to stabilize house prices and stem the tide of foreclosures, and new policies to heal the financial sector. Average GDP growth in 2010 is projected to be zero, but is projected to reach 1.5 percent on a fourth-quarter-to-fourth-quarter basis.

Japan

Japan was one of the few advanced economies to contract in 2008, as real growth fell 0.6 percent following 2.4 percent growth the previous year. In the wake of the global financial crisis, exports and business investment have plummeted, while the yen has appreciated substantially and equity prices have fallen by half.

For the year as a whole, consumer spending decelerated, increasing by 0.5 percent, compared to 0.7 percent in 2007. Non-residential fixed investment contracted—falling 3.7 percent after having increased 5.8 percent the year before—which removed 0.6 percentage points from real GDP growth in 2008 after having contributed 0.9 percentage points to growth the year before. Residential investment fell again in 2008, down by 6.9 percent after having fallen 9.3 percent in 2007, which subtracted 0.2 percentage points from real GDP growth for the year. Net exports contributed only 0.1 percentage points to real GDP growth in 2008 after contributing 1.1 percentage points in 2007. Exports of both goods and services decelerated in 2008, adding only 0.3 percentage points from real GDP growth. Imports of goods remained fairly stable, rising by 1.1 percent in 2008. Government spending was up by a modest 0.9 percent compared to an increase of 2.0 percent in 2007.

On a quarterly basis, Japan posted declines over the last three quarters of 2008, capped by the fastest rate of contraction posted by Japan in 35 years in the final quarter. GDP fell at an annualized real rate of 12.1 percent in that quarter, the steepest decline since Japan felt the full force of the 1974 oil crisis. The contraction was led by a 44.9 percent (annualized) decline in exports of goods and services in the fourth quarter. Non-residential fixed investment also contracted noticeably—falling by 19.8 percent (annualized)—the fourth consecutive quarterly decline. Household incomes fell as employment stalled and wages declined, resulting in a contraction of household consumption. Growth in personal consumption expenditures turned negative in the fourth quarter.

Three successive fiscal packages introduced since August 2008—which together total about 2 percent of GDP—coupled with the impact of the automatic stabilizers, will mitigate the depth and length of the recession4. However, the current downturn is projected to be the most severe in Japan's post-war history. The yen's strength and tighter credit conditions more generally have added to the problems of the export sector. Output is projected to decline by 6.2 percent in 2009, raising unemployment and pushing Japan back into deflation. A recovery in domestic demand from mid-2010 is expected to lift output growth into positive territory, although well below potential.

Euro Area

Economic activity in many of the advanced European economies had begun to contract well before the September 2008 financial meltdown, owing mainly to rising oil prices. Growth in the euro area slowed to 0.9 percent in 2008, down two thirds from the 2.7 percent rate posted in 2007.

The initial perception was that advanced European economies would escape a full-blown recession. Healthier household balance sheets in most major economies and different housing and financial market structures than for the U.S. were considered protective factors. However, financial systems suffered a much larger and more sustained shock than expected. Because of the close linkages between Europe's major financial institutions and their high leverage, the financial crisis rapidly transformed into a crisis for the real economy.

As a result, most advanced European economies have suffered sharp contractions since mid-2008. Real GDP fell at an annual rate of about 6.0 percent during the fourth quarter in the euro area. Real GDP is forecast to drop by 4.2 percent in the euro area in 2009 and continuing to fall for several more quarters, making this the worst recession since World War II. Growth is expected to contract by about 0.4 percent on an annual average basis in 2010. The recession is projected to be particularly painful in Ireland, as its construction boom has sharply reversed. As a result of the broad-based fall in output, unemployment rates in the advanced economies are projected to exceed 10.0 percent in late 2009 and climb further through 2011.

The downside risks around the projections for both advanced and emerging European economies are large, particularly for the latter, where external financial constraints could worsen further.

The key risk is a disorderly de-leveraging of large intra-European cross-border bank exposures. Such an event could make it impossible for many emerging economies to roll over large amounts of short-term debt and could potentially have a similar effect on some advanced economies that have seen a significant widening of sovereign risk premiums. The result could be a financial and real sector collapse in most emerging and a few advanced economies, with major feedback effects on the other economies. However, there are also some upside risks: if EU countries manage to put in place a forceful, comprehensive, and coordinated response to the financial sector travails, confidence and risk taking might recover faster than expected.

United Kingdom

Real growth in the U.K. fell from 3.0 percent in 2007 to 0.7 percent in 2008 as spending by British consumers decelerated by 1.4 percent in 2008, after increasing 3.0 percent in 2007. Spending slowed for both goods and services. Spending on non-durable goods turned down, while spending slowed for durables and semi-durable goods. Domestic investment fell 3.1 percent after having increased 6.8 percent in 2007, reflecting a downturn in dwellings. Exports of goods and services edged forward in 2008, up 0.1 percent. Imports of goods fell 2.0 percent while imports of services advanced 3.6 percent. Government spending accelerated in 2008, rising 3.4 percent compared to 1.5 percent a year earlier.

The U.K. posted quarterly declines in real output over the last three quarters of 2008, at an accelerating rate of contraction. Real GDP fell at an annual rate of 6.1 percent during the fourth quarter. Looking forward, the recession is expected to be quite severe in the U.K., which is being hit hard by the end of the boom in real estate and the contraction in financial activity. As a consequence, real GDP in the UK is forecast to drop by 4.1 percent in 2009 and by 0.4 percent in 2010.

Emerging Economies

Emerging Asia

The impact of the global crisis on economies in Asia has been surprisingly heavy. There were many reasons to expect Asia to be relatively shielded from the crisis: the region was not heavily exposed to U.S. securitized assets, and improved macroeconomic fundamentals and (with a few exceptions) relatively sound bank and corporate balance sheets were expected to provide buffers. Nevertheless, since September 2008, the crisis has spread quickly to Asia and has dramatically affected its economies.

The impact on the real economy through the trade channel has been severe and similar across Asia. The drop in global demand has been particularly focused on automobiles, electronics, and other consumer durable goods that are an integral part of the production structure across east Asia. As a result, exports and industrial production have plummeted.

Spillovers from the global financial crisis to domestic financial markets across Asia have also been substantial. Equity and bond prices have plummeted. Real estate markets have remained under pressure in a number of economies (for example, Singapore and China). Currencies have depreciated in most of the region's emerging economies, although the Chinese renminbi has remained broadly unchanged relative to the U.S. dollar. Portfolio and other flows have dwindled, implying tighter domestic credit conditions. As a result, many banks and firms have begun to experience serious stress.

Growth projections for Asia have been marked down to varying degrees, in line with weaker global demand and tight external financial conditions. The exact channels of transmission of the external shocks and the severity of their impact vary considerably across economies. Despite these impacts, emerging Asia is expected to continue to grow, led by China and India. A modest recovery is projected in 2010, underpinned by a pickup in global growth and a boost from expansionary fiscal and monetary policies.

Given their extreme openness and high dependence on external demand, growth in the newly industrialized economies (NIEs) (Hong Kong, Korea, Singapore, and Taiwan) is expected to decline at rates between 4.0 percent and 10.0 percent in 2009 as a result of the collapse in demand for consumer durable goods and capital goods in (non-Asian) advanced economies and, to a lesser degree, the deterioration in global financial conditions. Among these economies, Singapore and Hong Kong are particularly exposed, given their importance as global financial centres. Vulnerable corporate and household balance sheets will exacerbate the impact of external shocks in Korea. Nevertheless, NIE recovery in 2010 will be led by Korea, whose economy is projected to grow 1.5 percent in that year. The rebound will be more moderate in Hong Kong, which is projected to grow by 0.5 percent in 2010. The recovery is expected to take longer for Taiwan and Singapore, for which projected growth rates are zero and -0.1 percent, respectively.

China and India have also been affected by contractions in their export sectors, but their economies have continued to grow because trade represents a smaller share of their economies and policy measures have supported domestic activity. In addition, there were some signs of a turnaround in economic activity in China in the first quarter of 2009. At the same time, inflation pressures are subsiding quickly in most economies, owing to weaker growth and lower commodity prices.

Growth in China is expected to slow to about 6.5 percent in 2009, half the 13.0 percent growth rate recorded in 2007 before the crisis, but still a strong performance given the global context. Two factors are helping sustain the momentum despite the collapse in exports. First, the export sector represents a smaller share of the economy, particularly after factoring in its high import content. Second, the government has acted aggressively to provide major fiscal stimulus and monetary easing, which are helping boost consumption and infrastructure investment.

Like China, India is less exposed to the decline in global demand than the NIEs because trade represents a smaller share of its economy. Nevertheless, India's economy is still suffering from more difficult external financing for firms and banks, and because it has less room to ease macroeconomic policies, growth is expected to decline sharply from more than 7.3 percent in 2008 to 4.5 percent in 2009. The slowdown is primarily a result of weaker investment, reflecting tighter financing conditions and a downturn in the domestic credit cycle.

Association of Southeast Asian Nations (ASEAN-5) economies are being severely hit by the combined effects of lower global demand and tighter credit conditions, although not as harshly as the advanced economies. For the group as a whole (i.e., Indonesia, Malaysia, Philippines, Thailand, and Vietnam), growth is expected to decline from nearly 5 percent in 2008 to zero in 2009. Although these economies have also been hurt by the drop in global trade, the composition of their exports is less concentrated in the durable goods that have been most affected by the global downturn.

Emerging Europe

In emerging Europe, economic activity has taken a particularly sharp turn for the worse. Because of their heavy reliance on all kinds of capital inflows—notably funding from Western banks to sustain local credit booms—these economies were much more severely affected by the financial crisis than emerging economies in Asia.

Accordingly, real GDP in the emerging European economies is projected to contract by 3.7 percent in 2009 and recover to about 1.0 percent growth in 2010, down from growth rates of between 4.0 and 7.0 percent during 2002–07. The reasons for the sharp reversal in performance include, to varying degrees, overheating during pre-recession booms, excessive reliance on short-term foreign capital that funded these booms, ownership of banks by distressed foreign financial institutions, and a large share of manufacturing in economic activity. The fall in output is expected to be especially large in the Baltic economies (down 10.6 percent), where fixed exchange rate regimes leave limited room to manoeuvre; and is projected to extend into 2010 when it will likely decline a further 2.3 percent. In Central Europe, Hungary is also expected to experience a prolonged downturn, as output is expected to fall 3.3 percent in 2009 and by a further 0.4 percent in 2010. Poland is forecast to face a mild downturn in 2009 marked by a 0.7 percent decline in output, followed by recovery the following year when projected output will rise 1.3 percent. For Southern and South Eastern Europe, the downturn is projected to be more pronounced and lasting, with economic activity set to fall 3.6 percent in 2009 and by 0.2 percent in 2010.

Latin America and the Caribbean

The global financial crisis spread quickly to Latin American and Caribbean markets after mid-September 2008. Domestic currencies have depreciated sharply, especially in Brazil and Mexico, which are large commodity-exporting countries with flexible exchange rate regimes. Moreover, the economic slump in advanced economies—especially the United States, the region's largest trading partner—is depressing external demand and lowering revenues from exports, tourism, and remittances.

The slump in commodity prices has dampened growth prospects for the region's commodity producers (mainly Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Trinidad and Tobago, Uruguay, and Venezuela), although it has helped commodity importers in the Caribbean and Central America. Furthermore, the collapse in growth in advanced economies, particularly in the United States, has lowered demand for exports, weakened tourism, and lowered workers' remittances—key supports in the Caribbean and Central America. With all these factors playing out, credit growth has slowed abruptly, industrial production and exports have collapsed, and consumer confidence has plummeted across the region.

Considering the very challenging external environment, most countries are weathering the storm relatively well. Nonetheless, real GDP is forecast to contract by 1.5 percent in 2009, before staging a modest recovery in 2010. Domestic demand is projected to shrink by about 2.25 percent in 2009, due to more expensive and scarce foreign financing, as well as lower demand for domestic products. With the exchange rate acting as a shock absorber, activity is projected to decline modestly or even expand in a number of inflation-targeting economies (i.e., Chile, Peru, and Uruguay). The contraction is expected to be more severe in Mexico, given its close linkages with the U.S. economy, notwithstanding the mitigating effect of a flexible exchange rate. More precisely, the Mexican economy is projected to contract by 3.7 percent in 2009 before staging a modest 1.0 percent recovery in 2010. Brazil, on the other hand, is expected to experience a more limited downturn (of 1.3 percent) in 2009 followed by a more robust upturn (at 2.2 percent) in 2010.

Commonwealth of Independent States (CIS) Economies

Among all the regions in the global economy, the CIS countries are forecast to experience the largest reversal of economic fortune over the near term. The reason is that their economies are being badly hit by three major shocks: the financial turbulence, which has greatly curtailed access to external funding; slumping demand from advanced economies; and the related fall in commodity prices, notably for energy.

The beginning of the financial crisis coincided with slumping prospects for exports and commodity prices because of rapidly weakening activity in the advanced economies. This added to the pressure faced by CIS economies with open banking systems and severely undercut growth prospects for the commodity exporters, including Russia. Prospects differ noticeably between energy exporters and importers: the former are projected to see large current account surpluses evaporate because of falling commodity prices, while the latter see a sharp narrowing of their external deficits because of tightening financing conditions. Real GDP in the region, which expanded by 5.5 percent in 2008, is projected to contract by just over 5.0 percent in 2009, the lowest rate among all emerging regions. In 2010, growth is expected to rebound to more than 1.0 percent. With currencies under pressure, inflation is expected to remain close to double digits in the net energy exporters, despite slowing activity. Inflation pressures are expected to recede more quickly for the net energy importers. Russia, in particular, is projected to contract more (by 6.0 percent) than any other CIS economy in 2009, except for Ukraine, and experience one of the weakest recoveries in the region in 2010.

Middle East

The global crisis has not spared the Middle East. The extremely large fall in the price of oil is hitting the region hard. The deterioration in external financing conditions and reversal of capital inflows are also taking a toll: local property and equity markets have come under intense pressure across the region, domestic liquidity conditions have deteriorated, credit spreads have soared for some firms, financial system strains have emerged in a number of countries, and sovereign wealth funds have suffered losses from investments in global markets. Furthermore, the substantial decline in external demand (including from countries in the Gulf region) is dampening export growth, workers' remittances, and tourism revenues (i.e., in Egypt, Jordan, and Lebanon).

Although highly expansionary policies are set to mitigate their impact, these adverse shocks are expected to have severe negative effects on economic activity. In the region as a whole, growth is projected to decline from 5.9 percent in 2008 to 2.5 percent in 2009. The slowdown in growth is expected to be broadly similar in oil-producing and non-oil-producing countries, even though the forces behind it are quite different.

Among the oil-producing countries, the sharpest slowdown is expected in the United Arab Emirates (UAE), where the exit of external funds (which had entered the country on speculation of a currency revaluation) has contributed to a large contraction in liquidity, a sizable fall in property and equity prices, and substantial pressure in the banking system. A major financial centre, UAE will also suffer from the contraction in global finance and merger and acquisition activity. At the other end of the spectrum is Qatar, which is projected to grow by 18.0 percent in 2009 (up from 16.5 percent in 2008), since its production of natural gas is expected to double this year. Among the non-oil-producing countries, Lebanon is set to experience the steepest slowdown, as difficult external liquidity conditions raise the cost of debt servicing and the downturn in the Gulf reduces remittances.

Africa

Relatively weak financial linkages with advanced economies have not shielded African countries from the global economic storm. The main shock buffeting the continent is severe deterioration in external growth, which is reducing demand for African exports and curtailing workers' remittances. The sharp fall in commodity prices is also hitting the resource-rich countries in the region hard. Moreover, the tightening of global credit conditions is reducing FDI and reversing portfolio flows, especially to emerging and frontier markets (i.e., Ghana, Kenya, Nigeria, South Africa, and Tunisia). These external shocks are causing a severe slowdown in economic activity. For the region as a whole, growth is projected to decline from 5.2 percent in 2008 to 2.0 percent in 2009. On average, the downturn is most pronounced in oil-exporting countries (e.g., Angola and Equatorial Guinea) and in key emerging and frontier markets (notably Botswana, Mauritius, and South Africa), which have suffered from all three shocks that are hitting the continent. South Africa's economy, for example, is projected to contract by 0.3 percent in 2009, its lowest growth rate in a decade, as capital outflows are forcing a sharp adjustment in asset prices (mainly in equity, bond, and currency markets) and in real activity.

Assumptions and Risks

As indicated earlier, all projections in this chapter stem from the IMF's April 2009 World Economic Outlook. In making its projections, the IMF has adopted a number of technical assumptions that underpin their prognostications. Key amongst these assumptions are that (1) for most countries, real effective exchange rates remain constant at their average levels over the February 25-March 25, 2009 period; (2) that established policies (fiscal and monetary) be maintained; and, (3) that the average price of oil, measured as the simple average of prices of UK Brent, Dubai, and West Texas Intermediate crude oil, will be US$52.00 in 2009 and US$62.50 in 2010, and remain unchanged in real terms over the medium term. In addition, there are a number of working hypotheses concerning various deposit rates in the world's financial sectors. The interested reader should consult the Outlook for further details on these technical assumptions.

The modellers also have made a number of assumptions relating to the policy and macroeconomic environment surrounding the current financial crisis and economic recession. A key factor determining the course of the downturn and recovery will be the rate of progress toward returned health of the financial sector. The current forecast recognizes that financial stabilization will take longer than previously envisaged, given the complexities involved. It also recognizes the formidable political economy challenges of "bailing out" those who have made mistakes in the past. The baseline forecast thus envisages that financial strains in the mature markets will remain heavy until well into 2010, improving only slowly as greater clarity over losses on bad assets and injections of public capital reduce insolvency concerns and lower risks and market volatility.

The projected path to recovery also incorporates sustained strong macroeconomic support for aggregate demand. Monetary policy interest rates will be lowered to or remain near the zero bound in the major advanced economies, while central banks will continue to seek ways to use their balance sheets to ease credit conditions. The projections build in fiscal stimulus plans in G20 countries amounting to 2.0 percent of GDP in 2009 and 1.5 percent of GDP in 2010, as well as the operation of automatic stabilizers in most of these countries. Another key assumption is that commodity prices will remain around current levels in 2009 and will rise only modestly in 2010 as a recovery finally gets under way, consistent with pricing in forward markets.

Of course, any real deviations from the above assumptions have the potential to affect the reliability of the projections. Other risks and uncertainties may also hamper economic performance.

The IMF stresses that the current outlook is exceptionally uncertain, with risks still weighing on the downside. The key concern is that policies will continue to be insufficient to arrest the negative feedback between deteriorating financial conditions and weakening economies. On the upside, bold policy implementation capable of convincing markets that financial strains are being decisively addressed could set off a mutually reinforcing "relief rally" in markets, a revival in business and consumer confidence, and a greater willingness to make longer-term spending commitments.


1. All estimations and projections in this chapter come from the International Monetary Fund's World Economic Outlook, April 2009.

2. The Commonwealth of Independent States comprises Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine.

3. World Economic Outlook, Chapter 1.

4. OECD Economic Outlook, March 2009.