June 2009 informal round: Outlook for the international economy


June 2009 informal round: Outlook for the international economy

Table 1: International GDP growth forecasts(a)

World outlook and risks

The outlook for a severe contraction in the world economy in 2009 remains unchanged since Budget. World GDP is forecast to contract by 1½ per cent in 2009, before a modest recovery to growth of 2¼ per cent takes hold in 2010.

While the prospects for the world as a whole remain unchanged, the composition of growth amongst trading partners has changed, with a slightly worse contraction of 2¼ per cent now forecast for major trading partner GDP in 2009, followed by a firmer rebound of 2¾ per cent in 2010.

Recent US partial data have generally been 'less bad', consistent with expectations for the contraction in US economic activity to moderate over 2009 before a modest recovery in 2010. As a result, US forecasts remain unchanged since Budget.

In contrast, forecasts for the more trade-exposed economies of the euro area, Japan and Other East Asia have been revised ¾ of a percentage point lower in 2009 in the face of weaker-than-expected outturns since Budget.

The outlook for China has improved since Budget, with stronger-than-expected outturns for domestic demand, particularly fixed asset investment and credit growth, offsetting weaker export data. As a result, forecasts for Chinese growth have been revised ½ a percentage point higher in 2009 and ¼ of a percentage point higher in 2010.

Growth forecasts for India have also been revised higher, in light of stronger-than-expected March quarter GDP data.

The Budget forecasts were predicated on a degree of stability returning to financial markets. Recent indicators suggest this assumption is holding. Consistent with this, earlier concerns about potential catastrophic tail risks associated with the global financial crisis have diminished.

Policymakers are now increasingly turning their attention to exit strategies, with concerns centring on potential policy missteps as extraordinary interventions are unwound in future. For example, it is possible that necessary, but premature, fiscal consolidation could stifle the expected recovery toward the end of the forecast horizon.

Moreover, the extent to which household balance sheets are repaired and the risk of deflation becoming entrenched in Asia will be key factors affecting the global economy in 2010.