2009 outlook is stormy Around the World Raindrops Keep Falling

The global economy is sick and the prognosis for 2009 is gloomy at best. The United States and much of the EuroZone are expected to be in a recession next year, while the Asian and Latin American economies will slow significantly, according to global economists. "2009 is going to be a year where we need to wear our hard hats," says Sean O'Dowd, a senior capital markets analyst with Boston-based consulting firm Financial Insights. "We're going to take some artillery fire… it's going to be a nasty fight."
As the financial crisis intensified during the latter part of the third quarter and into the fourth quarter, the availability of credit around the world was severely diminished. This lack of credit has slowed spending in advanced countries and caused foreign investment in poorer nations to dry up. "The countries that have the bigger debt loads are going to get hit harder during this recession," says Thomas Hall, Ph.D. and professor of economics at Miami University in Oxford, Ohio. While economists believe the worst of the financial crisis and capital markets panic has ended, the damage to the global economy has been done. "The word 'credit' is derived from the Latin word meaning trust and people today have a lack of trust that they're going to be paid back," says Ray Torto, global economist with CB Richard Ellis. "It's a huge crisis of confidence, and we have to address that before the economy will improve." The International Monetary Fund (IMF) slashed its 2009 global forecasts in mid-November and now predicts contractions in GDP in the world's most developed economies. The IMF expects the world's largest economy, the U.S., to contract by 0.7 percent in 2009. And, the IMF's new projections for Europe are even gloomier than the European Commission's 0.2 percent growth forecast for 2009. EuroZone growth has been revised downward to -0.5 percent from 0.2 percent. The slowdown in Europe is expected to be widespread, with GDP expected to dip in Germany, France, Italy, and Spain. Across the globe, confidence is severely shaken, and it may never fully recover, experts warn. That means both consumers and businesses are increasingly risk averse and will do all they can to avoid spending money. "Global businesses' sentiment has never been as negative," says Mark Zandi, head economist at Moody's Economy.com, referring to his organization's Survey of Business Confidence. "The financial panic is too much for many businesses to bear." He contends that the "collective psyche of global businesses has been shattered by the ongoing financial panic." The Survey of Business Confidence showed that sentiment fell to another new low during the first week of November. Even worse, sentiment is weak across all industries. Across the globe, business confidence was -22 percent in mid-November. To put that number in context, readings between 25 percent and 30 percent are consistent with an economy that is expanding at potential. Survey readings below 10 percent are consistent with recession. The all-time peak was nearly 40 percent at year-end 2005. "Nearly all respondents think current conditions are eroding and that they will not be any better six months from now," Zandi says. "Pessimism regarding the outlook is overwhelming."Below, the Global Real Estate Monitor tours the globe and provides an economic forecast for 2009.
United States
The U.S. economy has deteriorated significantly under the weight of the financial turmoil, and experts predict that the worst is still ahead. The U.S. economy contracted during the third quarter 2008, and it is expected to shrink in the fourth quarter as well. In 2009, there will be little or no growth, according to experts. "The danger of a severe and protracted recession is high and will be even higher without prompt and forceful action by the federal government," Zandi says. Over the past year, real GDP has increased 0.8 percent, but it declined 0.3 percent in the third quarter, slightly better than the consensus expectation for a 0.5 percent drop but still down from growth of 2.8 percent in the second quarter. The U.S. economy is expected to decline 2.2 percent in the fourth quarter, and Zandi expects no growth in 2009, provided that another $300 billion stimulus package is passed. Otherwise, GDP growth could be negative by as much as 2.5 percent. Meanwhile, experts predict the unemployment rate will continue to rise into 2010, peaking near 8 percent. The most recent numbers from the U.S. Bureau of Labor Statistics show that unemployment was 6.5 percent in September 2008, the 10th straight month of net job losses. Moody's Economy.com forecasts employment to reach its cycle low in the third quarter of 2009, and unemployment to touch its cycle high in the first quarter of 2010.Even worse, consumers are tapped out, says Nathaniel Karp, an economist with Birmingham, Ala.-based Compass Bank. "Consumption is declining at the highest rates in three decades," he notes, adding that consumers are in one of the "worst situations" they've ever been in. While inflation has been a concern over the past 12 months, deflation will be a larger concern in 2009. To date, the U.S. has experienced only two periods of deflation in the past century: a brief and relatively painless episode in 1949 and during the Great Depression from 1929 to 1933. During that four year period, prices in the U.S. fell 23 percent, discouraging spending and investment.
Latin America
While commodity prices and demand for exports to the U.S. are falling, domestic demand throughout Latin America is rising. That means that most countries are facing slower growth and weaker currencies, but will manage to avoid a recession in 2009, experts forecast. Latin America will continue to slow, with regional GDP moderating to 3.4 percent. All Latin American countries will decelerate to 3 percent to 4 percent except Mexico, which will grow by 1.5 percent to 2 percent in 2009. That compares to roughly 2.4 percent this year. Mexico will be the slowest growing Latin American country in the foreseeable future. Mexico's peso has lost 15 percent of its value versus the dollar so far this year, which normally boosts Mexican exports by making them more competitive. Unfortunately, that will not be the case in 2009 since the U.S. and Europe both will have weak demand for imports. In macroeconomic terms, Brazil, Chile and Peru will remain the strongest in the region, while the weakest will be Argentina, Venezuela, and Colombia. Brazil, which has experienced problems with inflation in the past, will benefit from the swift and aggressive action its central bank has taken including rate cuts and the injection of massive liquidity into its banking systems. Argentina's economy remains uncertain, primarily because of issues related to the nationalization of pensions. If nationalization passes the Argentine Senate, then the country could use the $26 billion gained from private pension funds to refinance its debt and avoid default next year. However, in the medium to long run, the nationalization of pensions to pay off immediate debt obligations for 2009 would add to an already-burdensome national debt. For its part, Venezuela's future is also uncertain. The country's political environment is contributing to lack of investor confidence (see how Venezuela's political environment also is impacting its transparency for commercial real estate). Moreover, slumping oil prices are expected to have quite a negative impact on the country, which depends more heavily on oil revenues than does any other country outside the Persian Gulf. According to Moody's Economy.com, more than 90 percent of total export revenues come from oil, while nearly 60 percent of fiscal revenues are tied to this commodity.And, like the U.S. and Europe, Latin America is suffering from the credit crisis. Latin American companies are having a hard time securing short-term lines of credit to finance exports. While central banks around the region have tried to correct the problem, the Latin American equity markets would benefit from a less volatile global credit market.
The U.K. and EuroZone
Uncertainty in the credit markets will "cast a long shadow over Europe," according to Moody's Economy.com. European economies contracted in both the second and third quarters of this year, pushing the region into recession. In mid-November, European finance ministers decided against a EuroZone stimulus package, but its central banks have slashed interest rates. For example, the Bank of England cuts its rate by 150 basis points, and the European Central Bank lowered its rate by 50 basis points to 3.25 percent. The cuts are expected to give a much-needed stimulus to those weakening economies. In 2009, experts predict that United Kingdom interest rates will go as low as 2.5 percent. The U.K. and Germany, the largest economies in Europe, have already experienced significant slowdowns, and Central and Eastern Europe are expected to suffer severe recessions. Like the U.S., the region will undergo substantial economic pain as businesses and consumers continue to deleverage. Moreover, most EuroZone economies will be weighed down by decreased business investment, weak household demand and rising unemployment. The U.K. economy has faltered under the weight of the credit crisis, and like the U.S., it is experiencing its own residential market meltdown. As a result, the British economy contracted in the third quarter.Similarly, Germany, the largest EuroZone economy, has fallen victim to the weakened global climate. Largely dependent on exports to the rest of Europe, Germany has been weakened by both falling domestic and foreign manufacturing orders. However, the German government is working on a targeted stimulus package that is expected to shore up the economy. Unfortunately, a sharp recession in Eastern Europe now seems inevitable since most countries there have been running huge deficits and financing the deficit is almost impossible. That doesn't bode well for the EuroZone as a whole since 30 percent of EuroZone exports are destined for Eastern Europe, more than twice those bound for the U.S. Germany and the Netherlands are the most exposed – their exports to Eastern Europe account for 3.5 percent of their GDP.Moody's Economy.com says several Eastern European and Baltic countries face financial meltdowns akin to Asia in 1997. Across the region, the private sector, including consumers, had borrowed heavily in foreign currency at relatively low interest rates. However, much of the borrowing was short term, and few, if any borrowers hedged against currency fluctuation. Now, foreign currency is unavailable and currency exchange rates are in a freefall. Sadly, these countries have little foreign reserves to back their currencies.In times of stress, emerging economies have historically turned to the IMF, but there are worries that even the IMF might not have the resources to bailout all the countries in trouble. The IMF has approximately $250 billion in reserves – enough to provide 15 or so bailouts similar to the ones it provided for Ukraine ($16.5 billion) and Hungary ($15.7 billion). Moody's Economy.com says EuroZone and Swiss banks are most exposed to the travails of Eastern Europe and other emerging markets. They loaned $3.5 trillion to emerging economies, compared with $500 billion from the U.S. and $200 billion from Japan.
Asia-Pacific
While 2009 is expected to be a tough year for the U.S. and EuroZone, most Asia-Pacific countries will still see positive growth, albeit slower than the past few years. However, some Asian countries including Japan will actually fall into a recession. Unlike the U.S. and the EuroZone, Asia-Pacific's slowdown cannot be blamed on the financial crisis. In fact, most experts agree that the region got off pretty lightly compared to the rest of the world. The bank failures and write-downs that have bedeviled the U.S. and Europe have largely ignored the Asia-Pacific region, despite the large portfolios of U.S. assets that Asia has built in recent years. As of mid-November, Asia has yet to see a bank failure, or a bailout, related to the U.S. credit crisis.Indeed, Asia holds the largest piece of U.S. mortgage-backed securities – roughly $795 billion of mortgage debt consisting almost entirely of securities issued by Fannie Mae and Freddie Mac. But these securities are of high quality and not supported by subprime mortgages. Moreover, Asian investors have not taken a hit because of mark-to-market losses because international accounting rules do not require this type of mark downs for investments expected to be held to maturity.While Asia-Pacific is largely unscathed from the mortgage meltdown, the credit crisis has taken a bite out of the region's export activity. That's a big problem because exports make up a higher share of the region's GDP than in any other region in the world, according to Moody's Economy.com. Any decrease in overseas demand will have a marked impact on the region's economic growth (see related story on U.S. seaport activity). China, which has become the world's manufacturing center for everything from shoes to soap, has already seen its exports decline precipitously as demand from the U.S. and Europe withers. The country expects to post growth of around 9 percent over the next few years compared with 11.9 percent in 2007. Interestingly, anything below 8 percent GDP growth in China is considered a recession by the Chinese government. The rest of the Asia-Pacific region will likely follow China's lead, and countries that have come to rely on China to drive their economies will also see their growth rates decline. That means the next 12 months will be the toughest the region has seen in years, with growth at 10-year lows.However, the slowdown can be mitigated by government action. "In India and China, the government controls the major financial institutions," Zandi says. "It can keep the wheels of the real economy greased by simply ordering state-owned banks to provide liquidity to targeted markets."China, for example, recently unveiled a massive fiscal stimulus package, pledging spending of 4 trillion yuan through 2010. The government will focus on 10 major areas: affordable housing; rural infrastructure; expansion of transport networks; improvement in health and education systems; environmental protection; industrial innovation; post-earthquake reconstruction; raising average income; reform of value-added tax; and strengthening the role of the financial industry. The stimulus package is expected to help the entire Asia-Pacific region. Unfortunately, it won't help the regions that are really suffering, specifically the U.S., says Richard Green, Ph.D. and director of University of Southern California's Lusk Center for Real Estate. "There's no real chance that strength in other parts of the world will boost the U.S.," he says. "We forget that China, as massive as it is, is still much smaller than the U.S. economy. We're going to have to pull ourselves out of this." For more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net