The Global Economy Takes a Grimmer Turn Especially for Europe and Japan

In January, we calculated the likely impact of the global economic crisis by comparing the International Monetary Fund's (IMF) growth forecast for the crisis years with the average growth in the precrisis period of 2005–07. Given the release of new growth forecasts, we update our exercise here, but focus on the forecast for 2009. Three features are noteworthy.

First, the latest update of the IMF's World Economic Outlook puts all but two major countries in the red (i.e., negative growth) for 2009. Of the main G-20 countries, only India and China are forecast to register positive growth. Japan, Russia, Germany, and the United Kingdom are expected to have a particularly bad year, with large declines in their GDP. Others teeter between bad and grim (see column 3 in the table below).

Second, the April outlook is overwhelmingly more pessimistic than the IMF's January exercise. The penultimate column in the table below scales the estimated decline against the precrisis performance: the percent of precrisis growth reduced by the crisis. The last column shows the difference in this metric between January and April. A positive number in the last column shows the degree of overconfidence in January (or the degree of realism in April). The forecast for nearly all countries is significantly more negative than in January. For example, the IMF expects the decline in growth postcrisis as a percentage of precrisis growth to have deepened by another 100 percent in the euro area (this is equal to 2.2 percent annual growth for 2005–07) relative to its January forecast. Individually, pessimism is even deeper for Italy, Japan, and Germany. Mexico has also received a substantial downward revision.

Third, however, the pattern of pessimism remains broadly unchanged since January. The euro area still tops the country groups in the estimated decline relative to its precrisis growth. The worsening of the outlook for Central and Eastern Europe bumped the European Union as a whole one place up as well. The IMF is also noticeably more downbeat on the ASEAN-5. Among the individual countries, Italy, Japan, and Germany remain the most vulnerable, as before, while Russia's prospect has deteriorated significantly since January. The IMF's assessment remains unchanged for Korea. Brazil, India, and China still show remarkable resilience.