IMF says “demand has collapsed”, sees “deflation risk”

IMF J09.jpg

A year ago, the International Monetary Fund rightly warned that the world was facing a “serious economic slowdown”. This week, it has updated its forecasts, and now “expects the global economy to come to a virtual standstill in 2009”. This will be “the lowest rate of global GDP growth since World War II”. As the chart shows, the IMF expects all countries and regions to suffer:

• USA growth will be -1.5%, Eurozone -2%, UK -2.8%
• Japan growth will be -2.6%, China just +6.7%, Middle East +3.9%

The IMF has reduced its global growth figure by 1.75% since November, because of the global financial crisis. It says this “has weakened consumer and business confidence, raised uncertainty and destroyed wealth, leading to much lower consumption and much lower investment”. Emerging economies have been hit by 3 extra factors:

• A collapse in exports
• An inability to borrow overseas
• A decline in commodity prices

The IMF is, however, still forecasting a V-shaped recovery at the end of 2009. It argues that this could occur if a “comprehensive framework for restoring financial health” is put in place, including liquidity provision, capital injections, and the disposal of bad assets”. It also advocates large fiscal stimulus by governments to promote spending.

Clearly the IMF has to remain optimistic, as it attempts to persuade governments to adopt its policies. And the blog hopes the IMF is right. But it would be unrealistic for chemical companies to plan on this basis. Today’s demand slump, plus the growing risk of deflation, means that a U-shaped recession, lasting till 2011/12, is a more sensible Base Case.

The blog hopes that its recently published “CEO’s Survival Guide” will be useful, as companies start to update their 2009 forecasts.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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