Bratislava – October 29, 2008 —The global economy remains at substantial risk, but the speed and size of the various governmental rescue efforts bode well for a recovery in the not-too-distant future —this from the Deloitte Touche Tohmatsu Global Economic Outlook 4th quarter report. Written by five Deloitte global economists, it predicts that, although developed country economies will continue their serious downturns, the massive infusion of government money should restore activity to the credit markets and set the stage for recovery.  Emerging countries will feel the negative effects of this downturn.   

The report looks at the historical precedent of financial crises in Norway, Finland, Sweden, and Japan in the 1990s, as well as the United States during the savings and loan crisis.  It suggests that bank recapitalization can be beneficial to economies and that the financial burden on taxpayers is not necessarily onerous.  Yet the report also notes that economic downturns triggered by financial crises tend to be deeper and longer than those that start for other reasons. 

 “Unlike some past financial crises, this one resulted in a rapid and massive governmental response on both sides of the Atlantic,” said Dr. Ira Kalish, Director of Global Economics, Deloitte Research. “Thus, there are reasons we can be cautiously optimistic about the medium-term outlook for the global economy.”

The report offers a long-term view, suggesting impacts in multiple business sectors.  “The credit crunch is part of a long-term restructuring of the economy,” said Dr. Kalish.  “The result will see a shift in the U.S. economy away from a consumer-driven import base to an export-based economy. Asia on the other hand, will develop as more consumer-based economies. This creates opportunities and challenges for business across industry sectors.”

“In the United States, recapitalization of banks will help to revive credit market activity,” continued Dr. Kalish.  “Eurozone banking consolidation will have a positive long-term impact on European capital market efficiency.  Finally, the emerging economies of Russia, India, and China, while slowing, will remain important drivers of global growth.

“Once economic recovery resumes, inflation will be a significant challenge in many countries, with some like India and China already walking a tight rope. The longer it takes for countries like these to address inflation, the more difficult it will be to suppress future inflationary pressures.”

Offering a closer look at the impact of the volatile price of oil, Dr. Kalish said, “A drop in oil price could partially offset the negative impact of the credit crisis. However, relatively elevated oil prices will negatively impact production.” The OECD predicts this impact on growth to be greater in the U.S. due to its high reliance on energy and weaker currency (at US$120.00 per barrel, -0.21- -0.51 and -0.06- -0.2 percentage points in the United States and Euro Zone growth respectively).

Country findings:

• Brazil faces a slowdown in growth due to lower commodity prices and reduced demand for manufactured exports.  The country will probably resume moderate growth once the global economy eventually recovers.
• In China, the outlook is hazy, with GDP slowing and the Chinese government balancing as best it can both rising inflation and slowing growth.  
• India faces slower growth.  Longer term, the outlook will depend on the government’s ability to invest in infrastructure.
• In Japan, our best guess is that the downturn will be short-lived and the recovery will be relatively robust.
• Russia faces the perception of risk on the part of foreign investors.  Excessive dependence on oil is but one of several factors that pose future problems for Russia. 

“This report is meant to provide a strategic perspective about the economy for the business community,” explained Dr. Kalish. “In the current environment, it is important for companies in both developed and emerging countries to understand the risks they face and the potential impact on their business strategies.”

“Even though the Slovak financial market has not yet suffered any significant direct losses, the global economic crisis will have indirect impacts. Since the Slovak economy is strongly pro-export oriented, a drop in demand on our export markets will lead to a partial decline in the activities of manufacturers and their subcontractors in Slovakia which can already be seen in the decrease in production and employment in certain export oriented industries. At the same time, we can anticipate that access to loans for both the business sector and households will worsen and very likely result in a slowdown in investments and growth of household consumption. The ongoing uncertainty could also result in consumers, as well as companies, postponing large investments/purchases, which would have a negative impact on economic growth. While at present it is difficult to reliably quantify these negative impacts, the conditions of the Slovak economy are better than for example in Hungary or the Baltic States which will be directly and indirectly affected by the crisis to a much greater extent than Slovakia,” analysed the situation Ian Child, Partner in Charge of Financial Advisory Services, Deloitte Slovakia.

Download the full report:  Deloitte Global Economic Outlook: 4th Quarter 2008

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