The Economy: A Scorecard for the Global Slowdown

The first 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

By Beth Ann Bovino

This is the first of three parts.

One year ago, it seemed pretty clear to Standard & Poor's Ratings Services that the U.S. was in a recession. That has been confirmed by the National Bureau of Economic Research, which has said that the U.S. recession began in December 2007.

When we offered our global economic outlooks last March, we thought most economies around the world were in better shape in 2008 than they typically are to withstand a U.S. recession. But with few exceptions, the U.S. has once again shared its slump with global neighbors near and far. Although the rise of Asia and an improving picture elsewhere have reduced overall dependence on the U.S. as the leader for global growth, the U.S. is still a key part of the global economic equation. More important, the financial system problems that created the U.S. recession were far more widespread than many thought a year ago. Therefore, we believe growth in most emerging and developing economies will decelerate sharply as the developed world slides into recession.

The question for 2009 no longer concerns whether the world can escape a deep U.S. recession. What everyone wants to know now is: With so many countries sinking into recession at the same time, how severe will this global downturn become, and how long will it last?

Domestic demand and regional strength largely determine how other economies fare during a U.S. slump. In particular, many industrialized countries, which are more similar to the U.S., have not gotten a boost from government stimulus programs, at least not yet. But even countries that rely more on natural-resource exports are feeling the pinch of falling world trade and lower commodity prices. The drop in oil prices is a double-edged sword, helping consumers but hurting the OPEC and other oil-exporting countries.

The World Picture

This recession is the most synchronized in historical memory and seems likely to be the deepest downturn in the industrial countries since the Great Depression of the 1930s. It comes after an unprecedented period of world economic growth, making the contrast even more severe. We expect the recession to be long and deep. The U.S., which went into the recession slightly ahead of its peers, is also likely to emerge first, late this year. The European downturn will be similar to the U.S. recession in depth, but it is likely to take longer to run its course, in part because European economies are not fully synchronized. Japan now looks likely to have the deepest recession of the major industrial countries and could have the most difficulty in emerging because of its dependence on exports as an engine of growth.

Emerging Asia is in the best shape of the major regions. China is suffering because of the reduced demand for its goods in the industrial world, particularly in the U.S., but should be able to transfer the lead to domestic demand by spurring domestic consumption and increasing infrastructure spending. India is less export-sensitive than China but also has less room for fiscal stimulus because of the continuing budget problems it faces. Both countries are less dependent on external finance than in the past, which should keep them relatively immune from the financial problems, as long as China doesn't get too sensitive to potential investment losses.

Latin America, Africa, and the Middle East had been immune from the recession through mid-2008 because of strong commodity prices. However, the recent plunge in these prices, particularly for crude oil, is now extending the recession to these regions as well, and they might suffer the most because they have less room to substitute domestically generated growth for exports. These were the last regions to go into recession and are likely to trail on the way out as well.