World Economic Activity, 1998–2009 aBased on sentiment indicators from 41 countries. — bChange over previous year; Q1 2009 partly estimated.

The German Kiel Institute for the World Economy said today that in the first quarter of 2009 global production continued to shrink at a breathtaking pace, but indicators increasingly point to stabilisation of output in the course of the summer semester. However, it expects the coming recovery to be modest by historical standards. Global GDP is forecast to rise by 2.3 percent in 2010, again significantly below its trend growth rate. While this represents a slight upward revision from March projections, the outlook for economic growth in 2009 has significantly deteriorated further. Kiel now expects world output to drop by 1.5 percent (March forecast: –0.8 percent). The Institute says German exports will start growing, again, in the second half of the year.

Following the massive fall in world economic activity observed in autumn in the wake of the outburst of the global financial crisis, output continued to decline steeply in the first quarter of 2009 both in the industrial countries and in most emerging economies. Global GDP is estimated to have fallen by 1.8 percent in real terms compared to one year ago. On a sequential basis, the decline of real GDP in the G7-countries has even accelerated to an annualised quarterly rate of 8.3 percent, driven by huge declines in fixed investment and exports.

Kiel says the deep recession is now clearly visible on labour markets everywhere. Nevertheless, it says there are pronounced differences in the labour market performance across countries and regions. The extent of job losses and additional unemployment critically depends on the sectoral distribution of the declines in GDP, with unemployment most strongly in countries with a pronounced correction in labour intensive activities such as construction.

A number of indicators suggest that the pace of decline in the global economy has been moderating in recent months. World trade has been stabilising after January, with foreign trade in emerging countries even slightly rising. At the same time commodity prices have started to recover. Industrial production has shown increasing signs of bottoming out, and economic sentiment indicators, while still at very low levels, have started to improve.

Outlook: Production near its Bottom, but Strong Recovery not in Sight

Strong economic policy stimulus and gradual improvement of the situation in the financial sector lead the Institute  to expect an end of the decline of global production in the course of the summer period. However, Kiel says the subsequent recovery will be modest, in itsr view. A strong recovery, as has often been observed after deep recessions, is unlikely following episodes of financial market crises and housing market corrections, according to empirical work presented in today's German language report.

In the industrial countries, output will start rising noticeably only towards the end of the year. Private consumption should be sluggish given that employment continues to be reduced and the support from lower energy prices is waning (the oil price is assumed to be 70 dollar per barrel over the forecast horizon). Corporate fixed investment will even decline substantially further, depressed by extremely low capacity utilisation and difficulties in finding finance. Real GDP in the industrial countries as a whole is projected to fall by 3.7 percent this year and increase by a scant 0.6 percent next year (Table). With a decline in GDP of 2.5 percent in 2009 and an increase of 1 percent in 2010 the growth performance of the US economy is relatively strong. The Japanese economy will suffer substantially more, with output falling by 7.1 percent this year and almost stagnant growth in 2010. Kiel says the decline in GDP is massive also in the EU (–4 percent), with even stronger loss in output in the Eurozone. This, however, is mainly due to the steep fall of production in Germany – the Eurozone economy excluding Germany is forecast to shrink by "only" 3.7 percent. For next year the Institute expects a slight increase in European GDP. Unemployment is projected to increase substantially in all industrial countries and keep on rising in 2010 at least on the annual average.

The recovery in the emerging economies will be relatively more pronounced, although also here growth rates will be moderate compared to the previous upturn. Total world output should rise by 2.3 percent next year, still significant below the trend rate of growth, which is estimated to be close to 3.5 percent. For 2009, the economists expect a decline of global real GDP by 1.5 percent. The modest world economic expansion will be reflected in the development of world trade which is forecast to rise by a historically low rate of 3 percent in 2010, after a huge drop of –14 percent in 2009. Given further widening of the negative global output gap, inflation is expected to remain low despite somewhat higher commodity prices.

Real GDP, Consumer Price Inflation, and Unemployment Rate in the Industrial Countries in 2008–2010 (percent)