>World Recession

The world economy collapsed into steep recession in the final quarter of 2008 with global real GDP dropping at a 6 percent annual rate. This was undoubtedly the sharpest decline in world output and especially in world industrial production and world trade of the postwar era, with virtually all countries participating in the downturn and many registering record quarterly declines in real GDP.

Incoming data indicate that the global economic contraction continued through the first quarter of 2009, although perhaps at a somewhat slower pace than the preceding quarter. Downward momentum will likely continue at least through the spring. A number of forecasters and pundits foresee a global recession lasting through this year and perhaps well into 2010. However long the recession may last, the common expectation is that the recovery will be quite sluggish—the forecast of an L-shaped global recession and recovery. Despite a huge write-down in my global growth forecast from last September, I am more optimistic. Aided by substantial policy stimulus, growth in the Chinese economy should begin to accelerate in the first half of 2009 and the US recession should bottom out around mid-year with recovery accelerating to about a 4 percent annual rate by the fourth quarter. Recoveries in other countries will likely lag a little behind those in China and the United States. But, aided by a bounce-back in global trade from its recent extraordinarily sharp decline, the world economy generally will be in recovery by year-end. Then we will observe, as we have many times before, the Zarnowitz rule: Deep recessions are almost always followed by steep recoveries.

Before this recovery starts the world recession will become the deepest of the postwar era, with global real GDP falling about three-quarters of one percent on a year-overyear basis—the first significant decline of world real GDP in six decades. Output declines in the advanced economies (the traditional industrial countries plus Hong Kong, Israel, Singapore, South Korea, and Taiwan) will average 3 percent. Many emerging-market and developing countries, notably those in Central and Eastern Europe, will also see their real GDPs fall, but significantly positive year-over-year growth in China, India, and some other countries will keep growth for this broad and diverse group at about 1½ percent plus.

For 2010, global growth is projected to strengthen to 3.7 percent—a sharp rise from the preceding year but still somewhat below the potential global growth rate of about 4 percent. For the advanced economies, growth is expected to bounce back to 3 percent— enough to begin to narrow the margins of slack that developed during the recession. For emerging-market and developing countries, growth in 2010 is expected to rise to 4.7 percent, on its way back up to a potential growth rate above 6 percent.

To see full report: WORLD RECESSION