The Economy in 2009

What are the prospects for the economy in 2009? Frankly, they suck.

At the start of the year there vague hopes that the world might pull out of recession by the end of 2009, but they have been dashed.

The pricking of the housing and stock bubbles, and the re-adjustment of the global inbalances between consumption in the US and other advanced economies, and saving in China and other developing nations, has been rapid and painful.

In December 2008, the World Bank projected slight global growth of 0.9 per cent. Just 3 months later, in their 30 March update, they had revised that figure down to a 1.7 per cent decline. Others say it could be a 2 per cent plus decline.

This is a massive change at a global level, and would represent the first drop in global economic growth since the end of World War II.

World trade is expected to drop a massive 6.1 per cent this year, again unheard of in the post-war economy.

Governments and central bankers have taken drastic measures to try to counteract the sudden slump, but those measures will help only partially in developed nations, which still have trillions of dollars of de-leveraging to complete.

Developing nations are in a somewhat better position. China's stimulus package is already having some impact, and growth will continue in China and across the BRIc countries, although at a slower rate than previous years.

None of this will stop unemployment rising. The US is likely to pass the 10 per cent unemployment rate this year, together with many European countries.

Although the unemployment rate in developing nations will be less, the sheer size and relative poverty of the population in countries like China, India, Brazil and Indonesia mean that social unrest will growth, possibly leading to recruitment by extremists and terrorists.

Whatever the case, volatility will increase and no country is safe from the economic and financial shocks, and their unforseen consequences.