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GLOBAL SYNCHRONICITY

GLOBAL SYNCHRONICITY

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As of mid-February, consensus forecasts (via Bloomberg) are pegging world real output growth for 2009 at +0.6%, very close to the +0.5% growth rate the IMF changed their forecast to just a few weeks ago. TD Economics has for some time been more pessimistic and has stuck with our +0.5% forecast for global growth since last October.
However, as the figures roll in around the world for the fourth quarter of 2008, it appears that even the TD Economics forecast is too high. World output appears heading towards an outright contraction this year of at least -0.5%. This would be the first contraction in the post-war period. And, as we discuss below, even this may yet need to be revised lower.

As of mid-February, consensus forecasts (via Bloomberg) are pegging world real output growth for 2009 at +0.6%, very close to the +0.5% growth rate the IMF changed their forecast to just a few weeks ago. TD Economics has for some time been more pessimistic and has stuck with our +0.5% forecast for global growth since last October.
However, as the figures roll in around the world for the fourth quarter of 2008, it appears that even the TD Economics forecast is too high. World output appears heading towards an outright contraction this year of at least -0.5%. This would be the first contraction in the post-war period. And, as we discuss below, even this may yet need to be revised lower.

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Published by: International Business Times on Feb 21, 2009
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08/15/2012

 
www.td.com/economics
Global SynchronicityFebruary 20, 20091
TD Economics
GLOBAL SYNCHRONICITY
February 20, 2009
Special Report
HIGHLIGHTS
Recent consensus forecasts peg global eco-nomic growth for 2009 at just +0.6%.While TD Economics has been much more pes-simistic than consensus for some time, even ourforecasts appear to have been too optimistic.As a result, we now expect the global economyto contract in 2009 by -0.5%.This would be the first contraction of the globaleconomy in the post-war era.With the feedback from contractions in globaltrade flows into domestic demand and the on-going financial risks in Eastern Europe, we stillsee large downside risks for the global economy.
As of mid-February, consensus forecasts (viaBloomberg) are pegging world real output growth for 2009at +0.6%, very close to the +0.5% growth rate the IMFchanged their forecast to just a few weeks ago. TD Eco-nomics has for some time been more pessimistic and hasstuck with our +0.5% forecast for global growth since lastOctober. However, as the figures roll in around the worldfor the fourth quarter of 2008, it appears that even the TDEconomics forecast is too high. World output appearsheading towards an outright contraction this year of at least-0.5%. This would be the first contraction in the post-warperiod. And, as we discuss below, even this may yet needto be revised lower.The emerging picture of economic activity is clearlyshowing the synchronization of the cycle in almost everycorner of the world. Nowhere is this more readily seenthan in the ongoing deleveraging in international trade flows.The level of nominal exports (in US$ terms) is back to
G-7 GDP GROWTH RATES
-15-10-5051000.Dec02.Dec04.Dec06.Dec08.Dec-15-10-50510
USUKGermanyFranceItalyJapanCanadaQ/Q % (SAAR)Source: Haver Analytics
2003 levels in Taiwan (through January) and back to 2001levels in the Philippines (through December). If the Phil-ippines January figures follow some of the other regionaleconomies, they will be back down to 1997/98 levels. Infact, with figures still coming in, the apparent decline inglobal trade over the last four months (Oct-Jan) is uncom-fortably close to the decline seen over three years of theGreat Depression.But this synchronicity is not unique to Asian emergingmarkets (EMs). We have seen similar movements acrossadvanced economies, as well as EMs in Latin Americaand Central and Eastern Europe (CEE). In fact, as thechart on the bottom of page two shows, the changes intrade flows across EM regions remain highly correlatedwith each other. EMs remain part of a global system, andat its heart, that system is still driven by consumer demand
 
www.td.com/economics
Global SynchronicityFebruary 20, 20092
GLOBAL ECONOMIC OUTLOOK
 Annual per cent change unless otherwise indicated
2007 ShareForecastReal GDP(%)20082009*TDConsensusWorld (total)
99.13.1 -0.5
World (sample-adjusted)
81.22.8 -0.8 0.6
North America
25.51.1 -1.9 -1.6United States21.41.1 -2.0 -1.9Canada2.00.7 -1.4 -0.9Mexico2.11.6 -1.5 0.7
European Union (EU-27)
23.70.9 -3.0 Euro-zone (EU-15)16.10.6 -2.9 -1.8Germany4.40.9 -3.0 -2.5France 3.20.7 -2.2 -1.8Italy2.8-0.7 -2.8 -2.2United Kingdom3.30.6 -3.1 -2.4EU accession members3.42.1 -3.4
Asia
35.55.2 1.3 Japan6.6-0.4 -4.6 -2.9 Asian NIC's3.73.0 -3.2 2.5Russia3.25.6 -1.8 -0.7Developing Asia20.67.5 4.5 ASEAN-43.15.1 0.9 4.5China10.99.1 6.0 7.7India 4.66.7 4.7 7.2
Central/South America
6.14.9 0.4 Brazil2.85.1 0.6 2.9
Other Developing
8.45.5 2.3 *Bloomberg consensus forecasts as of Feb 13, 2009Source: IMF, Bloomberg, and TD Economics
RELATIVE SIZE OF ECONOMIC SECTORS
024681012USChinaUSChinaUSChina
Trillions of U.S. dollarsConsumerInvestment*Exports*Chinese value for 2008 estimated by TD Economics;Source: BEA and China National Bureau of Statistics
US/JAPAN RETAIL SALES & GLOBAL EXPORTSFROM EMERGING MARKETS
-60-40-20020406097.Jan00.Jan03.Jan06.Jan09.Jan-15-10-5051015
 
US & Japanese Retail sales (rhs) Asian exports (lhs)Latin American exports (lhs)CEE exports* (lhs)Y/Y % changeY/Y % change*Central and Eastern European; Source: TD Economics,national statistical agencies and Haver Analytics
emanating from advanced nations. For example, due totheir much higher level of income, U.S. consumers stillspend six times more than Chinese consumers, in spite of being outnumbered almost 5:1. EM economies continue togrow in importance, but they still lack the heft to carry theworld on their shoulders.And the links do not end there, because EM exportsalso tend to move closely with local industrial production,which itself tends to drive real GDP growth. Using statis-tical tests for causality, we have found that nominal U.S.retail sales, the trade-weighted U.S. dollar, and Asian in-dustrial production appear to hold a primacy in the globaleconomy, leading many of the economic developments seenaround the world. Changes in U.S. retail sales, as well asAsian industrial production, tend to lead changes in EMexports from Asia, Latin America, and Russia. Moreover,changes in the trade-weighted U.S. dollar tend to exert anadditional leading influence on Asian exports, as well aslead changes in industrial production in Latin American andCEE EMs. After these initial impulses, the feedback ef-fect appears to take over, spreading through trade and pro-duction trends around the world.
Preliminary Global Assessment
First estimates of the European GDP figures showedannualized Q4 contractions of -8.2% (Germany), -7.1%(Italy), -5.9% (U.K.), and -4.6% (France). Meanwhile,the Japanese economy contracted at a 12.7% annualizedpace in the fourth quarter and may see another doubledigit contraction in the first quarter of 2009. Suddenly, theU.S. 3.9% contraction in the fourth quarter, even after itslikely revision to a -5% handle, doesn’t look so bad. And,while the Canadian economy is likely to show a sizeablecontraction in the final quarter of last year as well, it has adecent chance of turning out to be “the best of the worst.”
 
www.td.com/economics
Global SynchronicityFebruary 20, 20093
ASIAN EXPORTS AND INDUSTRIAL PRODUCTION
-50-40-30-20-1001020304096.Jan98.Jan00.Jan02.Jan04.Jan06.Jan08.Jan-40-30-20-100102030
Exports (rhs)Industrial production (rhs)Y/Y % changeY/Y % changeSource: TD Economics, national statistical agencies, and Haver  Analytics
CENTRAL & EASTERN EUROPEAN EXPORTS ANDINDUSTRIAL PRODUCTION*
-30-20-10010203040506096.Jan98.Jan00.Jan02.Jan04.Jan06.Jan08.Jan-15-10-50510152025
Exports (lhs)Industrialproduction (rhs)*Excluding Russia; Source: TD Economics, national statisticalagencies, and Haver AnalyticsY/Y % changeY/Y % change
Across the G-7, the early evidence suggests that economicperformance did not deteriorate much more in the earlymonths of 2009, but nor did it get much better.In emerging markets, we have seen an increased con-cern in the last week over the fate of CEE economies andthe potential for their problems to infect Western Euro-pean economies. This risk is real. In recent years, West-ern European banks lending to CEE clients was very sig-nificant. With the much sharper than anticipated contrac-tion in Western Europe, this has led to a sudden deteriora-tion in the growth prospects for eastern economies. Theissue for the CEE economies is exacerbated by the prac-tice of some of these loans and residential mortgages be-ing taken out in foreign currencies. So as the CEE curren-cies have depreciated to reflect the deteriorated sentiment,this has led to the increasing cost of servicing these debts,which in turn leads to significant problems for those banksthat made the loans.While many of the smaller Asian EMs have been someof the worst hit to date, India and China remain remark-able in their resiliency. Industrial production in India hascontinued to decelerate, but at a rate that is almost un-changed since early 2007. In China, there has been a senseof stabilization since December. It would appear that theChinese stimulus plan has been able to make its presencefelt on the economy much faster there than elsewhere. Inpart, the relative small size of private consumer spendingin China may be helping them. In 2008, Chinese invest-ment spending was nearly the same size (in nominal U.S.dollar terms) as investment spending in the U.S., and wasslightly larger in magnitude than all of Chinese consumerspending last year. Because of the importance of invest-ment spending to the Chinese economy, infrastructure andgovernment spending plans have shown early signs of suc-cess.While we were never one to believe in the globaldecoupling myth, we did not expect the sudden and dra-matic retrenchment in global trade flows that we have seen.U.S. consumer spending, exacerbated by the disinflationarytrends, collapsed late in 2008. This meant demand for EMexports took a major hit. At the same time, while the ap-preciation of the U.S. dollar – and requisite depreciation of partner currencies – means that many EMs should be ableto gain some market share in the medium-term, the near-term impact was a sudden and sharp depreciation of thevalue of their exports. This must yet be distributed intolower corporate profits, investment spending, and employ-ment in these economies.And, while our forecast is now noticeably below con-sensus, it still incorporates an expectation for a global re-covery in the second half of the year. This is premised onthe expectation U.S. consumer spending will be driven byboth monetary and fiscal measures, as well as the ongoingstimulative impact of low gas prices. Moreover, the sharpglobal shifts have masked some other important positivedevelopments we think have gone under-noticed. Onewould be the fact that the U.S. is now running a tradesurplus once we exclude their net trade deficits in petro-leum products and with China. These two areas make upa sizeable 25% of U.S. total trade flows, but this does mean

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