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Economic Downturn Slowing But Real Recovery Still to Come - May 09

Source: OPEC_RP090502 5/13/2009, Location: Europe

The world economy has seen some positive developments recently with the rally in the stock markets, improved confidence and a more positive sentiment. However, volatility remains high and large uncertainties persist as the world economy struggles to emerge from recession. Moreover, given the depth and severity of the current downturn, the eventual recovery may be slower and weaker than the ones experienced in the past. Unemployment rates, in particular, may remain uncomfortably high and only gradually trend towards pre-recession levels.

Indeed, the current global recession may go down in history as the deepest and most synchronized downturn the world has experienced in the past sixty years. Per capita GDP is set to fall 2.5% in 2009 compared to an average drop of 0.4% in three previous global recessions in 1975, 1982 and 1991, according to the IMF. By several other measures —rise in unemployment— the current downturn is seen to be worse than the previous three. In particular, global trade is forecast to fall by 11% compared to previous downturns where it merely stagnated.

Projections for global GDP growth in 2009 continued to be revised down. World GDP is now expected to contract by -1.4% in 2009, down sharply from -0.8% last month and well below the initial forecast of 3.9%. OECD countries are seen to contract by 3.8%, while China and India will grow at a slower pace of 6.5% and 5% respectively. Risks continue to be skewed to the downside with fears that current policy measures may not be sufficient to reverse the downward momentum. Moreover, government efforts may be limited by budgetary constraints and dwindling public support.

Analysts are closely looking for developments that could provide an indication of the timing and speed of an economic recovery. Stock market performance — generally seen as a leading indicator for the real economy — has witnessed some improvement. The S&P 500 rose 9% in April and 34% since the low seen on 9 March. This increase was mainly driven by improvements in the banking sector, and by better-than-expected 1Q09 corporate earning results as well as by a general perception that the global economy might bottom out somewhere in the second half of 2009.

However, the recovery is still fragile and continued downward movement remains a possibility, Moreover, recent US economic indicators have shown some positive developments, with the purchasing managers’ indices (PMIs), equity values, housing sector indicators and inventory/sales ratios improving. Consumer sentiment has recovered to levels last seen in October and despite a 6.1% decline in GDP in 1Q09, consumer spending actually rose 2.2% following a sharp contraction in 2H08. Despite a less promising picture in EU and Japan, Euro-zone business and consumer sentiment has also improved while industrial production rose in Japan, which can be attributed to the inventory cycle. Within OECD countries, the US is likely to precede Japan and the Euro-zone in reaching a bottom.

Developing Countries as a group continue to face serious problems in coping with the financial crisis that originated in the advanced economies. The crisis is affecting them mainly through trade — which is forecast to fall 6.5% in 2009 and through sharply diminished private financial flows, as troubled banks in advanced economies reduce international lending. Despite these challenges, Emerging Markets are expected to lead the global recovery, powered by China.

Despite some positive signs, the improvement in sentiment should be seen as more a reflection of relief that the measures taken so far have avoided the worst rather than a conviction that a return to strong growth is imminent. A real recovery in the world economy may take some time to achieve. Similarly, in the oil market, prices have remained above $50/b due more to market sentiment than fundamentals. Considerable risks remain as oil market fundamentals are far from balanced due to the persistent contraction in demand and growing supply overhang. Whether this sentiment will lead to a sustainable recovery, despite the prevailing weakness in market fundamentals, remains to be seen.

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