UBS calls global recession in 2009

Asian growth too will be dragged down, but India seen unaffected

HONG KONG: The world economy will slip into a recession in 2009 and, although Asian economic growth will be dragged down as a consequence, India will escape relatively unscathed, with only minor downside risk to growth, say economists at the leading Swiss bank UBS.

In calling a global recession next year, economists Larry Hatheway, Andrew Cates, Paul Donovan and Sophie Constable at the Global Economics Research team flagged the “dramatic escalation in financial market stress over the past few weeks, particularly in inter-bank credit markets.”

In essence, this confirms that the crisis in the financial world, which saw the collapse of leading Wall Street investment banks last fortnight, is spreading cancer-like to the larger, real-world economy, in the US and around the world.

As a reason for their grim prediction, the UBS economists also cite “the pronounced
slowdown in much of the forward-looking economic data of late” from the US and other developed economies.

“Our global growth forecast for 2009 has been lowered to 2.2%, a significant downward revision from our previous forecast of 2.8%, and below the 2.5% demarcation point of a global recession,” Hatheway and the others noted. “We now believe national recessions in the US and the UK will be deeper and longer than previously forecast.” And for the first time, they also anticipate a recession in the Eurozone.

However, there’s good news for the major emerging economies, including India. “We believe that most countries within the emerging economy bloc should avoid recession and will register positive growth, albeit considerably weaker than that achieved over the past four or five years.”

UBS’ China economist Want Tao scaled down China’s GDP growth projections from 10% to 9.6% in 2008 and further to 8% in 2009.

India’s GDP growth, in turn, is expected to dip to 6.8% in 2008 before rebounding to 7.3% in 2009.

UBS’ regional economist Duncan Wooldridge said he was downgrading economic growth for Asia ex-Japan for 2009 to “recession-like conditions” - 6.1% (against 6.9% earlier), a sharp fall from the 7.3% expected for this year.

Hatheway and the others at the Global Economics Research noted that the “financial market stress” of recent weeks had renewed pressures on inter-bank rates, which increased borrowing costs for the household and corporate sector.  “The downward revisions to our growth outlook in developed economies therefore reflect poorer prospects for consumption and investment.”

In addition, key macroeconomic data over the past week - particularly the weak purchasing managers’ indices (PMI) from nearly every region - point to bad news. Global aggregate PMI - “our favourite leading indicator” - dipped to 44.2 in September, the weakest since the last global recession of the early 1990s. Typically, readings below 45 tend to coincide with global growth below 2.5%, which is a demarcation point for a global recession.

Going by the PMI, 21 of 25 economies are experiencing a contraction in the manufacturing sector. Ten of 25 economies are in the UBS’ estimate of recession, given by a reading below 45. Most of the developed economy bloc is included in this troubled category.

Even though manufacturing activity is no longer as important as services for some of the advanced economies, the economists note that “gyrations in the global manufacturing sector remain an important indicator of overall business confidence, as well as of hiring and capital equipment spending intentions.”

In response to the risk of recession, and a sharp fall-off in inflation figures, UBS economists expects central banks to adopt an easier monetary policy, lower real interest rates, and lower medium-term inflation expectations. They expect the US Federal Reserve Board to lower rates to 1% by the end of Q1 2009, and even sharper rate cuts in Europe.

Asia growth downgraded
Downgrading economic growth for Asia ex-Japan to 6.1% for 2009, Wooldridge noted that slower exports to the G3 and to the global economy would gradually lead to weaker domestic demand in Asian economies. An additional factor for the downgrade was the steep decline in Asian stock markets in recent weeks, which he said “is bound to influence consumption and investment.” As for corporate investment, the volatility in stock markets has “all but brought fundraising for investment to an end in Asian capital markets.” Besides, he asks, “even if businesses could raise more funds for investment why would they? Firms are becoming increasingly conservative regarding the outlook for profits and growth.”

In his reckoning, it’s too early to call a bottoming out of Asian economic growth as it’s only just beginning to slow. “Exports are just turning, while industrial production has only slowed for a few months. The key point isn’t so much that the global economy is slipping into recession... The salient point is that the global recession should be deeper and last longer than originally believed. Hence, the bottoming process is probably farther off than we would like.” Delayed recovery in economic growth and profits, he notes, adds another element of risk to picking the bottom too early, especially as there remains a long way to go in this process.

Wooldridge expects this to change by the first half of 2009. “We are not suggesting things will be good, but it is possible that 1H 09 could be a sort of ‘as bad as it gets scenario’. That could occur in the context of Asian central banks easing monetary policy and regional governments providing some fiscal stimulus.”