Fitch sees steep decline in GDPs of advanced economies

The world economy is entering a severe recession. Output is falling in the US, Japan, Germany, France and the UK, and this contraction in economic activity to intensify over the next 12 months. For the major advanced economies (MAEs, comprising the US, Eurozone, UK and Japan) in aggregate, Fitch Ratings is forecasting the steepest decline in GDP since the Second World War at -0.8%, in part reflecting the unusually synchronised downturn expected next year.

World GDP will grow by just 1% next year, the lowest rate since the early 1990s and compared to an average of 3.5% over the last five years. The combination of recession in developed economies, lower commodity prices and reduced international capital flows will result in a sharp slowdown in growth in emerging markets (EMs) though most will avoid outright recession.

The rapid intensification of the global credit crisis in the last two months and clearer evidence of household retrenchment, declining corporate investment intentions and falling world trade growth explain the sharp deterioration in the outlook since the summer. These factors far outweigh the benefits to income growth in the advanced economies from the decline in commodity prices.

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. However, the aggressive expansion of central bank liquidity provision since early September, in combination with major fiscal injections into the US and European banking systems, will head off the worst case scenario of widespread deflation.