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The Global Economy: Strong Headwinds for Europe and Asia

The second of a three-part report looking at how major countries are faring amid the global downturn, what they're doing to combat the weakness, and when they might recover

This is the second of three parts

Although the U.S. entered recession first, Britain and Japan—and to a lesser extent Europe—now face even larger hurdles. We expect both the British and Japanese economies to contract at a larger rate than that of the U.S. in 2009, while we expect the European recession to be more in line with that of the U.S. For the Asia-Pacific region as a whole, the recovery from the 1997 Asian currency crisis had been stronger than we expected, though not all countries rebounded equally.


Canada is now in a recession as well. We expect that its economy will contract over three quarters, starting from the fourth quarter of 2008. That would be the weakest showing in more than 15 years. Economic growth will likely decline 1.5% this year, sharply down from the 2.5% average rate Canada has posted over the last five years. Shrinking exports should lower overall growth as a strong Canadian dollar and soft growth—or outright contractions—for Canada's major trading partners stymie demand. The sharp decline in commodity prices will also tax Canada's resource sector, once a major economic support.

Domestic investment is suffering from continued weak business conditions and the financial stresses some companies are facing because of their restricted access to credit. Moreover, consumer spending, a strength in recent years, will likely slow as more cautious home buyers curtail purchases. However, the damage to the consumer will likely be less severe than in the U.S. because Canada's employment rate, though falling, is still close to record highs.


Australian economic activity has also slipped into recession, though less severe than in the U.S. and Canada. A flagging domestic economy and continued weakness among key trading partners have cut prospects of a soft landing for the Australian economy. Diminished consumer confidence and spending, a drop in business confidence, deteriorating labor market conditions, and a contracting housing sector will slow growth sharply, to a modest 0.1% drop this year, after seven years of solid growth and a 2.3% gain in 2008. Moreover, soft demand for Australia's commodities and the sharp drop in commodity prices from historically high levels increase the risk that Australia's recession could be worse.

Australia has benefited from the relatively strong growth in China and India, whose demand for resources helped counter the weakness in the U.S. China's commodity-intensive development, in particular, will likely boost Australia's resource industry. But while Australia's regional neighbors remain broadly supportive of its growth outlook, the nation's prospects have weakened in line with the slowing international economy.


Europe did not escape the problems that swept the globe in 2008. The recession is hitting every country in the euro zone, where growth is likely to contract 2.7% in 2009, 3.4% less than last year's modest 0.7% performance.

The financial crisis was the main source of pain for several European countries, particularly in Spain and Britain, forcing debt-ridden consumers to cut back on spending while housing markets collapsed. The contraction in world growth dramatically reduced export increases in other European countries, such as Germany, where one in four jobs depends on foreign trade. One saving grace for Europe is oil prices. If they remain low, it will support consumer demand and make the recession less severe. As with other countries, lower interest rates will also help reduce borrowing costs.

Japan and South Korea

We expect that Japan's recession will be its worst since World War II. After seven years of modest expansion, the Japanese economy will likely contract 4.0% in 2009 after already having fallen 0.7% in 2008. Two main engines of Japanese growth in recent years—corporate investments and net exports—have buckled under the credit crisis, the stronger yen, and a tumbling U.S. economy. That means added downside risk to export revenues this year.

Like Japan, South Korea had been relying on rapid growth in China to insulate it somewhat from the U.S. recession. However, with China cooling off, the global economy slowing down, and severe turmoil racking global credit markets, Korea, too, has slid into recession. Standard & Poor's Asian economists expect the Korean economy to shrink 3.5% in 2009 after 2.5% growth in 2008.

Developing Asia

Although the international community is feeling the effects of recession in the U.S. and in Europe, some regions are more prepared to withstand these less-favorable global conditions. For example, developing Asian economies have so far taken only minor injuries. The fastest growth continues to be in that region, especially in China and India. Standard & Poor's expects that China will expand at a 6.5% pace and India at 6.0% in 2009. Though healthy, those rates are well below the respective 9.0% and 7.4% growth those nations posted in 2008.

Latin America

Unlike developing Asia, Latin America wasn't able to sidestep the deep recession in industrialized countries. Although Latin American economies continue to derive some support from Asian resource demand, the slowdowns in China and India and the drop in commodity prices are hitting Latin America hard. Standard & Poor's projects that the region's real gross domestic product will grow 0.7% in 2009, decelerating sharply from a 4.5% gain last year. The significant drop reflects the unrelenting global weakness, strain in capital markets, and low commodity prices. These forces have also depressed domestic demand, which we expect to decelerate sharply in 2009 despite some countercyclical fiscal and monetary policy measures across the region.

Next: A look at systemic threats to the global economy — and how major nations are responding.

Bovino is a senior economist for Standard Poor's.

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