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Expect ‘Severe’ World Economic Downturn Next Year, Analysts Say

Fitch Ratings estimates that the U.S., Europe and Japan will see a contraction of 0.8 percent in their combined gross domestic product in 2009, in contrast to estimated GDP growth of 1.1 percent for 2008.

September 16, 2011
Global economic conditions have gone from bad to worse in a hurry, prompting analysts at Fitch Ratings to predict that a “severe” global recession will consume the world’s most developed economies next year.

In a report released Tuesday, November 4, Fitch analysts estimated that the U.S., Europe and Japan will see a contraction of 0.8 percent in their combined gross domestic product in 2009, in contrast to estimated GDP growth of 1.1 percent for 2008. That would register as the most significant decline in global economic growth since World War II.

It appears the U.S. economy may be the most severely affected, igniting an “unusually synchronized downturn” next year. Fitch predicts U.S. GDP will decline by 1.2 percent next year, in contrast to its 1.4 percent growth in 2008 and 2 percent gain in 2007.

With the credit crisis intensifying greatly in the last two months, consumer confidence has declined to all-time lows, and Fitch expects that will translate into a 1.6 percent decline in consumer spending next year. Fitch noted that U.S. consumers have been the “predominant sources of global demand” over the last several years and have driven major economic growth in both developed and emerging market nations.

At the same time, the confidence of corporations in the U.S has eroded significantly over the last two months. Many companies are now investing less in their businesses, a trend that will likely continue well into 2009 because banks have tightened their lending standards, making it more difficult for companies to access credit.

Companies invested 5 percent less in their businesses in the third quarter than they did in the second quarter, Fitch pointed out, and its analysts predict that overall business investment will drop by 6 percent next year. In 2007, companies increased investments in their businesses by 5 percent over the previous year.

Fitch also expects the unemployment rate in the U.S. to hit 7.8 percent next year and 8.3 percent in 2010, up from its current level of 6 percent. The rise in joblessness will contribute to, and perhaps prolong, the global economic downturn, with Fitch analysts suggesting that signs of recovery may not appear until 2010. But the analysts conceded that it is almost impossible to tell when the downturn might let up.

Recession driven by a contraction in the supply of credit is uncharted territory for the world economy, and there are few historical parallels on which to gauge its possible depth or length,” wrote the London-based team of Fitch analysts. “The process of deleveraging by households and companies is now under way and this will weigh on spending for some time.”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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