Has Global Stag-Deflation Arrived?

NEW YORK – The latest macroeconomic news from the United States, other advanced economies, and emerging markets confirms that the global economy will face a severe recession in 2009. In the US, recession started in December 2007, and will last at least until December 2009 – the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5%.

The recession in other advanced economies (the euro zone, United Kingdom, European Union, Canada, Japan, Australia, and New Zealand) started in the second quarter of 2008, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more severe since then.

There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices, and capital flight take their toll on growth. Indeed, the world should expect a near recession in Russia and Brazil in 2009, owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries.

Other emerging markets in Asia, Africa, Latin America, and Europe will not fare better, and some may experience full-fledged financial crises. Indeed, more than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey, and Ukraine in Europe; Indonesia, Korea, and Pakistan in Asia; and Argentina, Ecuador, and Venezuela in Latin America. Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions (including the IMF) provide enough lending to cover their external financing needs.