Banks may rise and fall, CEOs may come and go, but ordinary people feel the pain in the global economic markets only when growth slows down, and the increase in annual incomes and expenditures that they take for granted reverses its trend.
All this is set to happen as the International Monetary Fund (IMF) joins the Asian Development Bank (ADB) in forecasting a slower rate of economic growth than before (See: The world is slowing, says ADB; cuts Asian GDP growth forecast).
The IMF cut its forecast for global growth this year to 3.7 per cent, the slowest in six years, and predicted a 25 per cent chance of a world recession, citing the worst financial crisis in the US since the Great Depression of 1929. It defined world recession as global growth slowing below the rate of 3 per cent per annum.
This downgrading is the second consecutive in recent months, after the Washington-based global lender had predicted a 4.1 per cent global growth rate in January when the full impact of the sub-prime mortgage crisis and the ensuing credit squeeze could be gauged (See: Global growth to slow to 4.1 per cent in 2008: IMF). Even this came after a projection of 5.2 per cent in July, just as the crisis was breaking.
The cause and the effect
''The financial shock that originated in the US sub-prime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system'', the IMF said in a statement.
This comes after global financial institutions were forced to write down more than $232 billion in credit losses and declining asset values, topped by UBS's announcement on Tuesday that it stands to lose a massive $19 billion more than the $18.4 billion already declared. (See: UBS announces fresh $19 billion loss; Deutsche Bank loses additional $3.9 billion)
Central banks will need to conduct policy ''as flexibly'' as the circumstances warrant, the IMF said, adding that the European Central Bank (ECB) has room to lower rates. The ECB has left its benchmark rate at a six-year high of 4 per cent as inflation runs at 3.5 per cent, above its goal of 2 per cent and almost the fastest pace in 16 years.
The IMF predicted a US growth rate of a measly 0.5 per cent, far below the 1.5 per cent it had pronounced in January. The pain is expected to continue, with 2009 growth forecast at 0.6 per cent. This is in tune with what Ben Bernanke, Federal Reserve chairman, said earlier. ''It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' he said.
The IMF statement also mentioned the dangers ''from the still-unfolding events in financial markets'', especially the possibility ''that deep losses on structured credits related to the US sub-prime mortgage market and other sectors would seriously impair financial-system capital'' and catalyze the ''current credit squeeze into a full-blown credit crunch.''
For Japan, the second largest economy in the world after the US, the IMF predicted a growth rate of 1.4 per cent in 2008, slightly down from the 1.5 per cent predicted in January this year. China will grow 9.3 per cent this year, slower than the 10 per cent projection made in January, the statement said. The IMF also said that world inflation will remain elevated at least in the first half of 2008.
Closer home, the outlook for Asian developing countries is also somewhat poor. Although they have enjoyed much higher growth rates in the recent past, and may well continue to do so as compared to the West, they are not immune from the turmoil sweeping the markets in this globalised world. This is the opinion of the Asian Development Bank (ADB), which revised downwards its 2008 economic growth forecast for developing Asian economies.
The ADB numbers
In the Asian Development Outlook 2008, the Asian Development Bank watered down Asian economic growth projections, excluding that of Japan, to 7.6 per cent from 8.2 per cent predicted six months ago. The bank has projected 7.8 per cent GDP growth for 2009. The developing economies registered 8.7 per cent average growth in 2007, measuring highest in terms of expansion in almost two decades.
ADB has also marked a coincident slowdown of the major industrial economies, surging food and fuel prices and a simmering credit crisis in the United States.
ADB's chief economist Ifzal Ali has said that Asia will not be immune to the global economic slowdown, though it would not be hostage to it either. He said Asia is tied to global activity through traditional trade channels, and even more so given its closer integration in international financial markets.
Ali said Asia's developing economies continued to be closely linked to the G3 - the United States, Eurozone and Japan - economies, all of which were forecast to slow this year. ''There is absolutely no evidence of decoupling when we look at either the trade or financial data -- the evidence is rather to the contrary,'' he said.
He added that favorable policy conditions and strong productivity growth associated with Asian economic modernisation and structural change will keep the Asian economies on a '''robust growth path.'' The Manila-based multilateral agency said, ''Although problems will spread from the global economy to developing Asia - a problem that is already visible in high-frequency trade and financial data -the region's growth in 2008 is much more likely to moderate than to lurch down.''
ADB predicts inflation to spike to their highest regional levels in over a decade during 2008, in spite of administrative steps and subsidies to rein in rising prices. It forecasts inflation is jump to 5.1 per cent in 2008, and relax to around 4.6 per cent in 2009, with price hikes being the highest in Central Asia, where inflation would stay in double digits for some time to come. This figure of 5.1 per cent is the highest since the 6.1 per cent during the 1998 Asian financial crisis when the so-called ''Tiger economies'' went bust.
Inflation is already at its highest in 11 years in China, and is now threatening Vietnam, and even India. The Asian Development Outlook asks of policymakers to tackle the problem at its root.
Numbers not too bad
It says that the main economic powerhouses of China and India are estimated to grow moderately, at 10 per cent and 8 per cent respectively in 2008. It says that China, being more open to trade than India, will have a more pronounced impact due to the slowdown in US, European Union and Japan.
South Asian economic growth is projected to lose some of its steam in 2008 due to moderation in Indian GDP growth. Pakistan, Bangladesh and Sri Lanka would also experience deceleration as exports are expected to suffer.