Economic outlook for 2008‑09, 2009-10 and 2010-11
march 2009
 (this report incorporates domestic and international data released up to 17 March 2009)

Overview
Outlook for the domestic economy
Household consumption
Dwelling investment
Business investment
Public final demand
Exports, imports and the current account deficit
Employment, wages and inflation
Prices and Wages
Outlook for the international economy
World outlook
Country summaries

Overview
The global economy has continued to slow with surprising speed as the corrosive effects of the financial crisis continue to detract from economic activity. Global trade volumes have plummeted and production and employment data suggest the world economy will experience a deeper recession in 2009 than expected at UEFO. In view of these developments, a recession in the domestic economy now appears inevitable.  
Treasury’s global growth forecasts have been downgraded by a full 1¾ percentage points since UEFO. World GDP is now forecast to contract for the first time in sixty years, shrinking by 1¼ per cent in 2009, slightly weaker than the IMF outlook. The speed at which the global outlook is deteriorating is reflected in the sharp contraction in global GDP in the December quarter which exceeded already pessimistic expectations.  The decline was the largest in the post war era, and recent indicators point to another large decline in global GDP in the March quarter. Persistent financial market distress and low levels of confidence have led to downgrades in growth expectations for virtually every country. 
In light of the deteriorating global outlook, GDP growth forecasts for Australia have been revised down to 0 per cent in 2008-09 and -¼ per cent in 2009-10, falls of 1 per cent in both years from UEFO expectations.  
It has become clear that the effects of the global recession have impacted on domestic conditions more rapidly than initially thought, reflected in the 0.5 per cent fall in real GDP in the December quarter of 2008.  In particular, household consumption did not hold up as strongly as partial indicators had suggested, with declines in real financial wealth and weaker confidence representing a substantial barrier to consumption growth. It now appears likely that the global crisis has dragged the Australian economy backwards by a similar amount in the March quarter 2009, and the economy is not expected to record positive growth until the first half of 2010.  
Table 1: Key Domestic Forecasts – March compared with UEFO              Source: ABS Cat. No. 5206.0, 6345.0, 6401.0, 6202.0 and Treasury.

Weaker global conditions are impacting across the economy, with downward revisions to expectations across most sectors. The collapse in global demand has seen commodity prices fall sharply, with further falls expected as long term contracts are renegotiated in coming months.  Exports contracted in the December quarter, but further significant declines are expected in light of the collapse in global trade and announced production cutbacks by major commodity exporters.
Business investment, recently at three decade highs as a share of the domestic economy, is unsustainable at these levels in the face of ongoing credit constraints, plummeting global trade volumes, falling commodity prices and a weak outlook for domestic demand. Sharp falls are expected over coming quarters, and business investment is now forecast to fall by 19 per cent in 2009-10, which would be the largest year average fall on record.
Fiscal and monetary policy are key to moderating the impact of global conditions on the domestic economy.  Cash payments to households helped avoid a contraction in household consumption in the December quarter and will support consumption over the next 6 months, although underlying household consumption remains very weak as households struggle to rebuild their savings in the face of sharp falls in wealth and fears of job losses. Direct government expenditure flowing from the Nation Building and Jobs Plan and other packages will be critical to supporting demand over the forecast horizon, with public final demand expected to grow at its fastest rate in over a decade, and provide its largest contribution to GDP growth since the mid-1970s.  Any slippage in this spending by the States will significantly weaken the outlook, particularly in 2009-10.
Monetary policy has been eased significantly and would be expected to rekindle investment in the dwelling sector and bolster household consumption over time.  However, in the short term falls in asset prices and weak confidence are weighing more heavily on the household sector. Recent sharp falls in building approvals mean that the expected recovery in dwelling investment will now come later than anticipated at UEFO, with investment not expected to stage a full recovery until 2010-11.
There are significant risks around these forecasts, particularly the quarterly estimates.  Large movements in the economy can lead to significant swings in the quarterly data, as was evident in the December quarter of 2008, which was affected by largely offsetting movements in imports and inventories. The ABS estimates of actual growth in the December quarter for the different measures of GDP had a range of nearly one per cent.  Forecasts are subject to even greater uncertainty. A large rundown in stocks in the December quarter 2008 resulted in a significant detraction from GDP growth. Businesses are expected to continue to run down inventories over the forecast period but at a slower pace, implying a modest contribution to GDP. 
We have prepared an additional forecast year for the March JEFG process, for 2010-11 to give an indication of the economy’s recovery path as it comes out of recession.  Real GDP in 2010-11 is forecast to grow by 2¼ per cent, still below trend, with the unemployment rate rising to 8¼ per cent in that year. With the economy expected to grow above trend in later years, this would be the peak in the unemployment rate.  While providing accurate forecasts is even more difficult this far out, the economy’s forecast path is consistent with other periods of recovery from recession.
The 2010-11 forecasts take account of the effects of the CPRS, which adds 1.1 percentage points to the CPI in that year.  In the absence of the CPRS, inflation pressures would be expected to be subdued over the forecast horizon, with both headline and underlying inflation growing at 1½ per cent through 2009-10 and 2010-11 (both headline and underlying measures).

Outlook for the domestic economy
The forecasts for the domestic economy are underpinned by several technical assumptions. The exchange rate is assumed to remain around levels observed at the time of writing (a trade‑weighted index of around 57 and a $US exchange rate of around 67c). Interest rates are assumed to decline broadly in line with market expectations, which suggest a cash rate of 2.5 per cent by May 2009. World oil prices (Tapis) are assumed to remain at around $US 50 per barrel. The farm sector forecasts are based on an assumed return to average seasonal conditions over the forecasting period, but take into account the effects of sustained drought conditions in the preceding period.
The new forecast year, 2010-11 takes into account the economic impact of the Government’s Carbon Pollution Reduction Scheme due to commence in July 2010. 
Household consumption
Households have been the beneficiaries of recent deep cuts to mortgage interest rates, cheaper fuel prices and additional payments from the Australian Government.  The Economic Security Strategy and the Nation Building and Jobs Plan will together add around $19.7 billion to household incomes, principally in 2008-09, providing a significant but temporary boost to household consumption. 
Nonetheless, the uncertainty around global financial conditions, combined with a forecast slowing in employment growth and sharply lower household wealth, are expected to weigh heavily on underlying household consumption growth in 2008-09 and 2009‑10. The stock market is now around 50 per cent below its record high of late 2007, while median nominal house prices have fallen by around 3 per cent over 2008.  The resulting declines in wealth are expected to focus households on increasing saving, with some recovery in the household saving ratio already apparent.
Household consumption is expected to grow by 1 per cent in 2008-09 before falling by ½ per cent in 2009-10 as the unwinding of the stimulus packages coincides with a weaker labour market. This would be the worst outcome on record and in part, reflects household’s reaction to the largest through‑the‑year fall in real financial wealth on record. Household consumption is expected to recover in 2010-11 although remain below trend.
Chart 1:  Real consumption with and without stimulus chart
Source:  ABS Catalogue Number 5206.0 and Treasury.
Chart 2: Household consumption and
gross disposable income 
(Real, Year average change) Source: ABS Catalogue Number 5206.0 and Treasury.
Chart 3: Household saving ratio
Source: ABS Catalogue Number 5206.0 and Treasury.
Dwelling investment
The near term outlook for the residential construction sector has deteriorated since UEFO, with data for housing finance and building approvals indicating a weaker starting point for any recovery in this sector. Total dwelling investment is now expected to be flat in 2009-10, down from the 4 per cent growth forecast at UEFO.  Total dwelling investment is expected to grow by 10½ per cent in 2010-11, making a significant contribution to the economic recovery in that year.
Dwelling investment includes two components – the construction of new houses (new dwelling investment) and alterations and additions to existing homes.   New dwelling investment is expected decline by 4 per cent in 2009-10, while investment in alterations and additions is expected to grow by 4 ½ per cent, supported by the Government’s energy efficient homes program for housing insulation.  Significantly lower mortgage rates, combined with population growth and a continuation of reasonably high rental yields are expected to support investment during 2010‑11. 
Chart 4: Dwelling investment (real)
Source: ABS Catalogue Number 5206.0 and Treasury.
Slight falls in house prices have already been recorded in light of weakening demand, but the factors that are supporting investment activity and the First Home Owners Boost are also expected to support house prices at close to their current levels over the forecast horizon. There is a risk that house prices could slide by more than expected if consumer sentiment is further battered by bad news, such as rapidly rising unemployment.  This would impact not only on forecasts for dwelling investment but also on the outlook for consumption and GDP growth. 
Business investment
Momentum in new business investment is expected to help sustain a modest 2½ per cent growth rate in 2008‑09.  The impact of the global recession is expected to bite hardest in 2009-10, as firms cut back on  investment activity in the face of tight credit conditions, plummeting global trade volumes, weaker commodity prices and weak domestic demand. Reflecting the deteriorating outlook,  business sentiment has weakened further in recent months and all business surveys consistently show weaker investment intentions. Sharp falls in investment are expected in coming quarters and business investment is expected to decline by 19 per cent in 2009-10.  This would be the largest  annual decline on record and see business investment as a share of GDP falling from recent record highs to around pre‑mining boom levels (Chart 4). A modest recovery in business investment of 3½ per cent is forecast for 2010 11. 
Chart 5: Business investment to GDP ratio (nominal)
Source: ABS Catalogue Number 5206.0 and Treasury.
Investment in new machinery and equipment is expected to fall by 16½ per cent in 2009‑10 with CAPEX investment intentions indicating particular weakness in manufacturing, construction and property and business services. In 2010-11, investment in new machinery and equipment is expected to grow by 4 per cent, as domestic and global demand strengthens. 
New engineering construction investment is expected to fall by 14½ per cent in 2009‑10. A rise of 5 per cent is expected in 2010-11, based on an expectation of a few high value projects in the oil and gas sector commencing work later in 2010.  
Significant projects that are expected to commence in the forecast period include; Gorgon Joint Venture, Inpex Alpha LNG Ichthys, and Woodside LNG Browse. However, there remain significant downside risks to this forecast, with the possibility of further delays or cancellations to mining projects in light of falling commodity prices and to projects that are facing difficulty in securing financing. 
A sharp fall of 38 per cent is expected in non-residential buildings investment in 2009-10 followed by a flat outlook in 2010-11. Recent approvals data for the sector have plummeted, with activity particularly affected by difficulties obtaining funding. Higher unemployment and a weaker consumption outlook are also expected to weigh on activity in the office and retail building sectors. 
Chart 6:  Private non-residential approvals
Source:  ABS Catalogue Number 8731.0.
Public final demand
Growth in public demand is partially offsetting the significant weakness in private consumption and investment demand.  Public final demand is forecast to grow by 4¾ per cent in 2008‑09, 7½ per cent in 2009‑10 and 1 ½ per cent in 2010-11. 
The growth figures in 2009-10 and 2010-11 reflect the Nation Building and Jobs Plan and other infrastructure packages contributing around $23.5 billion to Commonwealth and State and Local government investment over the forecast period.  As a consequence, public investment is expected to grow by 25½ per cent in 2009‑10, the largest increase on record, driven principally by State and Local investment.   
The huge boost to public spending will see public final demand increase sharply as a proportion of the nominal economy over the forecast horizon (Chart 7).  
Given the importance of public final demand to GDP growth in 2009-10, the forecasts depend critically on public spending programs being implemented as announced. As such, there are significant risks around these forecasts, including slippage in spending by other jurisdictions and budget constraints on State governments. 
Chart 7: Nominal public expenditure
Source: ABS Catalogue Number 5206.0 and Treasury.
Exports, imports and the current account deficit
Since UEFO the global outlook has continued to deteriorate, which has resulted in further downward revisions to the forecasts of the external sector. The collapse in the global economy over the past few months has been dramatic, with the G7 in recession and demand in China showing clear signs of slowing sharply. The trade deficit is expected to increase sharply in 2009-10 as recent sharp falls in spot prices for commodities continue to flow through to negotiated contract prices. A widening in the trade deficit is expected in 2010-11, as domestic demand for imports strengthens ahead of a recovery in global demand.  
Net exports are expected to contribute 1 percentage point to GDP growth in 2009‑10 due to a significant fall in import volumes as the domestic economy weakens, and in response to the depreciation in the exchange rate. Net exports are expected to detract ¼ of a percentage point from growth in 2010-11 as import volumes recover more quickly than export volumes.  
Export volumes are expected to be significantly weaker than at UEFO, falling by ½ per cent as global demand contracts. Modest growth of 5 per cent is expected in 2010-11, reflecting a recovery in the global economy.  
Non-rural commodity volume growth is now expected to moderate to ½ per cent in 2008‑09, remain flat in 2009‑10, and recover strongly in 2010-11.
The collapse in global demand for steel and raw materials has been sudden and dramatic, and producers have sharply cut production.  While such cuts have been substantial, in most cases they have been insufficient to prevent a substantial build in inventories.  The only ray of hope has been China, where in some commodities (steel, iron ore and copper in particular), recent demand numbers have been surprisingly strong.  
Nonetheless, it now appears that demand is unlikely to recover significantly until the beginning of 2010 at the earliest. While there is the potential for Chinese demand growth to surprise on the upside – owing to monetary and fiscal expansion measures – the key issues driving commodity markets in the short term are the scale of any further production cuts, and the timing of the end to current consumer destocking.  
Chart 8: Import/Export contribution
Source: ABS Catalogue Numbers 5206.0 , 5302.0 and Treasury.
Farm production is expected to increase by slightly more than at UEFO due to a larger winter crop. This is expected to flow through to rural exports, which, after solid growth in 2008-09, are expected to grow by 8 per cent in 2009-10 and remain flat in 2010‑11. The main effect of the weaker world economy on rural exports is expected to be on prices, which are forecast to fall sharply. 
Sharply lower world growth is expected to more than offset the boost from the recent depreciation in the exchange rate for elaborately transformed manufactures (ETM) and services exports.  ETM exports are expected to contract by 6½ per cent in 2009‑10, with a particularly acute decline for car exports, where the outlook has deteriorated rapidly following the sudden collapse in demand in key export markets, particularly the United States.  Growth in services exports is forecast to fall by 3½ per cent in 2009‑10.  A moderate recovery in both ETMs and services is anticipated in 2010-11 as global demand strengthens. 
Imports of goods and services are expected to fall by 2 percentage more than at UEFO, bringing the decline to 4¾ per cent in 2009‑10. This largely reflects a weaker outlook for business investment which has a large imported component.  
The terms of trade are forecast to decrease by 13¼ per cent in 2009‑10, a slightly larger fall than at UEFO. Recent contract negotiations indicate that contract prices for the major bulk commodities are likely to fall in line with UEFO expectations. Other prices are expected to fall slightly more than UEFO, reflecting the weaker world outlook.  The terms of trade are assumed to be flat in 2010‑11, but the difficulty in forecasting commodity prices out this far means there remains the risk of further changes in commodity prices.  
Chart 9: Terms of trade
Source: ABS Catalogue Number 5302.0 and Treasury.
The current account deficit (CAD) is expected to widen to 5¾ per cent of GDP in 2009‑10 and remain around this share in 2010-11. With the net income deficit (NID) now expected to remain broadly flat over the forecast horizon, changes in the trade balance drive the profile.  From a savings and investment perspective, gross investment is forecast to decline as a share of GDP over the forecast horizon.  Gross savings is forecast to rise in 2008-09 as households seek to rebuild savings, before declining in 2009-10 as corporate savings fall in line with reduced profitability.  The public sector is expected to move into a significant deficit position.
Chart 10: Current account balance
Source: ABS Catalogue Numbers 5206.0, 5302.0 and Treasury.
Employment, wages and inflation
Labour market
 The outlook for the labour market has been downgraded further since UEFO, reflecting a significantly weaker outlook for the economy. 
Employment is now expected to fall by 1 per cent through the year to the June quarter 2010, a full percentage point lower than forecast at UEFO. 
Employment is then expected to gradually recover in 2010-11 as economic conditions begin to pick up, growing by ¾ of a per cent through the year to the June quarter 2011.
Chart 11:  Employment Growth and Participation Rate
Source:  ABS Catalogue Number 6202.0 and Treasury.
The unemployment rate is now expected to reach 8 per cent by June quarter 2010, peaking at 8¼  per cent in June quarter 2011.
The forecast unemployment rate for June quarter 2010 represents an upward revision of 1 percentage point. The further rise in the unemployment rate in 2010‑11 reflects an expectation that employment growth will remain below labour force growth for most of the year, given traditional lags between GDP growth and employment growth.
The participation rate has remained higher than expected over the past few months, supported by growth in part‑time female employment, but the participation rate is expected to decline in line with a deteriorating jobs market, as potential job seekers become discouraged by rising unemployment. The participation rate is forecast to fall steadily across the forecast horizon, reaching 64½ per cent by the June quarter 2011, a fall of 1 percentage point from its high of the June quarter 2008.
Prices and Wages
Wages
Wages growth is expected to moderate in line with the weakness in domestic demand and rising unemployment. The tightness seen in the labour market over the last few years has eased as businesses become reluctant to hire new workers in view of the slowdown in the economy. It will take some time for the broader weakness in the economy to be reflected in wages, with recent outcomes remaining strong. 
Growth in the WPI is expected to ease to 3¼ per cent through the year to the June quarter 2010 and remain around this rate over the forecast horizon.
Prices
Inflation forecasts have been revised down further since UEFO, driven by weakening demand and an anticipated weak labour market over the forecast period. Both headline and underlying inflation are forecast to ease over the forecast period.  In the absence of the CPRS, both headline and underlying inflation would be expected to be 1½ per cent through 2009-10 and 2010-11.
Chart 12: Headline Consumer Price Index
Source:  ABS Catalogue Number 6401.0 and Treasury.
The introduction of the CPRS in July 2010 is expected to provide a one off increase in prices of around 1.1 per cent in 2010-11, bringing the CPI through the year to June 2011 to 2½ per cent. 

Outlook for the international economy
Table 1: International GDP growth forecasts(a)

World outlook
As the global financial crisis intensified in September 2008, strong global and financial integration combined to produce a very sharp decline in world trade and production, with global GDP collapsing in the December quarter 2008. The decline in global GDP in that quarter exceeded already pessimistic expectations, and was the largest recorded decline in the post war era. Recent indicators point to another large decline in global GDP in the March quarter, although at this stage, the decline is unlikely to exceed the magnitude of the December quarter.
Against this backdrop, and in light of continued financial market distress, low levels of confidence, and the apparent limited effects thus far of recent policy responses to restore the health of the financial system, growth forecasts for 2009 have been marked down for every country (Table 1).
Global GDP is now forecast to contract for the first time in sixty years, by 1¼ per cent in 2009. Compared to UEFO, the current forecast for 2009 is a substantial downward revision of 1¾ percentage points (Chart 1). 
No economy has emerged unscathed from the effects of the global financial crisis. Within our major trading partners economies, advanced economies are expected to bear the brunt, with deep contractions forecast this year, particularly in Japan. China is forecast to grow at a below-trend pace, but will be the main source of growth in 2009. In other emerging economies, growth will be impeded by a combination of weaker external demand and lower commodity prices as well as the associated negative spillover effects on domestic demand.
Chart 1: World GDP growth Source: IMF and Treasury.
The massive macroeconomic stimulus, on both the monetary and fiscal fronts, as well as measures to shore up bank balance sheets and restore credit flows should help the global economy  eke out a gradual recovery in 2010. 
However, any self-sustaining recovery is conditional on the success of comprehensive policy steps in stabilising financial conditions, a gradual improvement in credit conditions, a restoration of global trade flows, as well as a bottoming in the US housing market and a marked lift in confidence. The deleveraging process will continue, acting as a substantial headwind to the economic outlook. 
Notwithstanding the significant global policy response, the global financial crisis shows little sign of abating in the near term. Global stock markets have fallen around 50 per cent since their peak, while indicators of stress in money and credit markets — both inter-bank and corporate bond spreads — remain elevated.
Ongoing pressure on bank balance sheets suggests that conditions are unlikely to normalise anytime soon. Much depends on the success of policy responses aimed at removing toxic assets from the balance sheets of US and European banks. 
According to the IMF, losses for financial firms worldwide will ultimately reach US$2.2 trillion, and  the IMF estimates that US and European financial institutions are likely to experience a net capital shortfall of at least US$500 billion. While part of this projected capital shortfall may be met from internal sources and from private capital markets, it is likely that further significant injections of public capital will be required.
Risks
The most significant downside risk to the outlook revolves around an intensification of the negative feedback loop between the real economy and the financial system. This would lead to an even deeper and more prolonged recession, and work to delay the projected recovery. 
However, should the policy measures prove effective at restoring stability in financial markets and boost consumer and business confidence, the substantial macroeconomic stimuli cascading through the global economy will present upside risks to these below trend growth forecasts. 
The global output gap will continue to widen into 2010, and by implication, deflationary forces will continue to mount. With annual inflation likely to enter negative territory in a number of major economies, fears of deflation will intensify, although the massive expansion of the monetary base by central banks will act to limit the risk of substantial deflation becoming entrenched. 
When growth returns, the current downturn will leave a legacy of high unemployment and marked deteriorations in fiscal positions in many advanced economies. Thus, policymakers will continue to face significant challenges over the medium term.
Country summaries
The United States economic outlook has deteriorated considerably since UEFO, reflecting weaker economic conditions, a lack of traction for the Financial Stability Plan, a weakening outlook for business investment, and the final fiscal stimulus package being smaller and less front‑loaded than originally anticipated. Given this bleak outlook, GDP is forecast to fall by 3 per cent in 2009. Growth is forecast to reach ¼ per cent in 2010 and 1¾ per cent in 2011.
GDP fell by 1.6 per cent in the December quarter 2008, with consumption the largest detractor from growth in the quarter. With rising unemployment, and plunging values of all three major asset classes on household balance sheets — real estate, equities, and non‑equity financial assets — the outlook for consumption remains weak.
The labour market continues to deteriorate at an alarming pace, with payrolls falling sharply and the unemployment rate rising rapidly. The number of jobs lost so far in this recession already exceeds the total in each of the previous two recessions. 
Meanwhile, credit conditions are extremely tight, adding to the bleak consumption outlook for the first half of 2009. Some recovery in consumption is expected in the second half of 2009, due to the tax credits from the fiscal stimulus, and the flow on effects of the creation of a projected 3.5 million jobs.
Business investment weakened significantly in the December quarter, reflecting the strong decline in the equipment and software component. The structures component also declined in the December quarter for the first time since 2005, and is expected to weaken further in coming quarters. Business investment is not expected to recover until mid‑2010 due to an intensification of the adverse macro‑financial feedback loop.
The slump in the housing market continues, with the large oversupply of homes adding further downward pressure to house prices.  House prices have fallen by 27 per cent since their peak in mid‑2006 according the Case‑Shiller house price index and futures markets anticipate a further 8 per cent fall by May 2010.  Given the fall in prices and massive oversupply, building permits have plummeted suggesting residential investment will detract from growth for some time yet. A recovery is not expected until the second half of 2010.
While the US outlook is bleak, there is some upside concerning the fiscal stimulus package. Our current estimates of the fiscal stimulus’s impact on consumption may be conservative, especially in 2010. Should financial market policies restore trust and confidence, then the impact of the stimulus will be bolstered.
The Japanese economy remains in deep recession, with few signs that the pace of contraction has abated over recent months. Japanese exports and industrial production have suffered an astonishing collapse on the back of depressed global demand and the strong yen, highlighting the country’s reliance on export‑led growth. Japanese equity markets are now at over 25 year lows and credit conditions have tightened, while business and consumer confidence remain mired at near all‑time lows. Consumption continues to provide limited support to growth amid a worsening employment and income situation.      
Compared to UEFO, Japan is expected to suffer a deeper and more protracted recession, with GDP forecast to contract by 5½ per cent in 2009 — substantially worse than the previous forecast of a 2½ per cent contraction. A modest return to growth of ¼ per cent in 2010 and ¾ per cent in 2011 is forecast.
Since UEFO, the outlook for China has softened only very slightly, with continued sharp falls in export demand being only partially offset by the impact of fiscal stimulus and strong lending growth. The Chinese economy is forecast to grow by 6¼ per cent in 2009, before recovering to 8 per cent in 2010. 
China’s export growth has contracted sharply in recent months due to extremely weak global demand — especially from Asia — falling by over 40 per cent in value terms since December 2008. Slower global demand will put further downward pressure on China’s exports, while investment growth will continue to be affected by a subdued property market and the flow‑on effects of lower export demand. Investment is expected to pick up from mid‑2009 as a result of the Government’s fiscal measures aimed at boosting infrastructure investment. Growth is expected to be around 8½ per cent in 2011, due to stronger major trading partner growth and the continued effects of the stimulus package.
Sustained weakness in global demand remains a key downside risk to China’s forecasts. This, coupled with weak industrial production outcomes, means that more stimulus measures may be needed if the Chinese Government wants to meet its target of 8 per cent growth in 2009. However, there have been signs that the stimulus package is already flowing through to the Chinese economy. Loan growth surged over December and January, while investment in transport‑related infrastructure, a large part of the stimulus, has risen sharply. 
The resilience of the Indian economy is fading rapidly. Growth of only 3¼ per cent is now forecast for 2009 before a slight recovery to 4¼ per cent in 2010. Industrial production is in sharp decline as demand for India’s manufacturing exports has dried up. India’s vast services sector, having provided strong support to growth in recent years, will now struggle to stave off the compounding negative impacts of mass job losses, diminishing foreign investment, tight credit conditions and waning business confidence.  
The capacity of the Indian Government to respond to falling growth is also very limited.  Debt levels are high, promoting warnings of a looming downgrade of India’s credit rating to below investment grade. Monetary policy also can provide only limited relief owing to low levels of household indebtedness and the limited capacity of India’s domestic financial institutions to substitute for competitive foreign sources of credit. 
The economic outlook for the Newly Industrialised Economies (NIEs) has continued to worsen amid the ongoing fall out from the global recession. The NIEs’ heavy dependence on exports and their close financial integration with the rest of the world has made them extremely vulnerable.  
The value of exports for the NIEs fell by 34 per cent through the year to January 2009, a trend that is likely to continue through most of the year, although the magnitude of the decline should begin to ease as the year progresses. Industrial production has also plummeted as firms ran down inventories in response to the rapid decline in external and domestic demand. 
GDP for the region is now forecast to decline by 4½ per cent in 2009, with Taiwan and Singapore expected to suffer steeper contractions than during the Asian Financial Crisis. With the global economy expected to stage a modest recovery, growth in the NIEs is forecast to grow by 2¾ per cent in 2010.
Economic activity in the ASEAN–5 region has weakened significantly in recent months, led by a collapse in exports against a backdrop of constrained global financial markets. GDP is forecast to decline by ¾ per cent in 2009 before strengthening to 3¼ per cent in 2010 and 4¾ per cent in 2011. 
Exports are expected to contract further in line with weaker major trading partner growth, investment is expected to remain weak as borrowing costs and access to funds remain challenging, while consumption is also expected to moderate sharply. Growth is forecast to strengthen towards the end of 2009 and into 2010 as external conditions begin to improve and fiscal stimulus measures begin flowing through the economies.
The outlook for the euro area has deteriorated significantly since UEFO. Following a record contraction of 1.5 per cent in the December quarter 2008, GDP is forecast to contract by 3¼ per cent in 2009 and make only a mild recovery, with growth of ¼ per cent in 2010.   
The recession in 2009 is expected to be led by investment as a result of deteriorating credit conditions and lower internal demand, and declining export growth in line with sharply weaker global demand. Private consumption is expected to remain weak reflecting low confidence levels, falling employment and negative wealth effects. Predicated on a recovery in the external environment and reflecting the impact of policy actions, a below trend recovery is forecast.  
Growth prospects for the United Kingdom have deteriorated markedly, driven by the stress in financial markets. GDP is forecast to contract by 3½ per cent in 2009 — the largest contraction since World War II. A mild recovery is expected in the second half of 2009, conditioned primarily on improvements in the cost and availability of credit. 
The recession in 2009 will be broad based, led by a contraction in dwellings and business investment, followed by private consumption. Despite the large depreciation of the sterling, net exports are not expected to provide a significant contribution to growth. GDP is forecast to grow by ½ per cent in 2010.
Forecasts for the New Zealand economy are also gloomy, with the economy facing a protracted adjustment  to household balance sheets and the current account. The economy has been in recession since the beginning of 2008, and GDP is forecast to contract by a further 2¼ per cent in 2009.