Feeling the pulse of the global economy

Timmer explained that the global economy was going through “a perfect storm,” with the global recession, the credit crunch, and languishing confidence working together in a very negative dynamic.
The investment banking collapse last year and the ensuing credit crunch were followed by a sharp decline in industrial production across the world, especially in economies specializing in investment goods, such as Taiwan, China; and Japan.
The crisis was preceded by eight years of extraordinary economic growth in developing countries, supported by double-digit growth in investments. And investments are especially hard hit now by the tough financial conditions.
With the decline in industrial production has come an immediate fall in commodity prices—more than a 50 percent drop in oil prices and more than 40 percent in non-oil commodity prices.
The World Bank now expects a 6.1 percent contraction in 2009 in the volume of world trade in goods and services. The value of world trade will collapse much more because of the fall in commodity prices.
This is bad news for government revenues. It is the poorest countries that depend most on trade for their fiscal revenues. For example, in Lesotho, Swaziland and Cote d’Ivoire, between 40 and 50 percent of fiscal revenues come from trade. “The immediate impact of the financial crisis has been on the private sector, but before the year is out, we will likely see many countries run into fiscal problems,” Timmer warned. “This is because governments are already beginning to see a decline in revenues, while their spending has to increase and borrowing costs are up.”
World GDP growth is likely to increase to 2.3 percent in 2010, but significant risks could mar this outlook. For example, if balance of payments crises are not prevented, much sharper contractions would occur in 2009, possibly continuing into 2010.