>The Global Economy, From Recession to Recovery (GOLDMAN SACHS)

Global growth has continued to improve and it now appears that the deep recession that began in the US in late 2007 and then spread to many other countries has finally ended. Key measures of financial stress have improved and risky assets have staged impressive rallies since mid-March. Looking forward, the global economy is seeing increasing differentiation between the G3— where the growth outlook remains fragile—and robust growth in most emerging markets (EMs).

Indeed, the big story for EMs during the crisis appears to be that there was no big story: by and large, their strong fundamentals allowed them to weather the shock better than most had expected. We forecast that EMs will grow by 2.8% in 2009 and by 7.3% in 2010. In contrast,
among advanced economies, we expect GDP to decline by 3.2% and increase by 1.9% in 2010. For the world as a whole, we are projecting GDP to decline by 0.9% this year and then rebound to 4.1% next year, up from our estimates of -1.2% and 3.5% published in the previous
issue of the Global Economics Analyst.

In the US, we expect growth to accelerate to 3%qoq annualised in 2009H2 on the back of fiscal stimulus, a pick-up in housing construction and inventory restocking. However, growth is likely to decelerate to 1.5% by the second half of next year as fiscal stimulus fades, investment spending continues to decline and consumption growth remains weak in the face of high unemployment. Given this anaemic recovery, we expect the Fed to keep the Funds rate near zero at least until 2011.

In Euroland, our latest forecast sees GDP declining by 3.8% in 2009, an improvement over our earlier forecast of -4.4%. Growth is likely to have turned positive in Q3 and should average 1.2% in 2010. We think the ECB will start ‘tightening by stealth’ over the next few quarters by draining liquidity from the overnight market, and then begin to raise policy rates in the second half of 2010. We expect the UK economy to contract by 4.1% in 2009. However, financial conditions have eased much more in the UK than in continental Europe, which should help propel growth to 1.9% in 2010.

Although GDP growth in Japan turned positive in Q2 thanks to a strong contribution from net exports, domestic demand remains quite weak. We expect GDP to decline 5.7% in 2009 and grow 1.4% in 2010 and Japan’s balance of payments to continue to deteriorate. In the light of this difficult economic outlook, the BoJ is likely to keep the policy rate at 0.1% for the foreseeable
future.

To see full report: GLOBAL ECONOMY