Crisis Talk (2)

Yesterday we started a new series of blog postings on the unfolding financial crisis. Today's topic: how bad can things become?

Bad. Germany's forecasters just updated their views for 2009, now suggesting growth of 0.2%, and possibly as low as -0.8%. "A number of negative shocks from outside Germany had already clouded the economic climate. But the dramatic developments on the financial have led to an even sharper deterioration in prospects," the forecast added.

The Irish economy has already gone into a recession, with production declining by 0.5% in the last quarter. Capital investment was also 18.8% lower in the quarter compared with 2007, with significant declines in house building as well as in the acquisition of transport equipment and machinery. During the same period, France and Italy shrank 0.3%, while the Netherlands saw zero growth.

Hungary also cut its 2009 forecast last Friday, to 1.2%. Ukraine is facing troubles too. The Baltics and the Balkans have bigger external deficits than Hungary, and may come into trouble too.

Meanwhile, the Korean won has lost more than 30% of its value relative to the dollar this year. This makes it difficult for businesses to access credit. In a statement yesterday, the government said it would guarantee for three years all external debt taken on by South Korean banks before 30 June 2009 in order "to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market."

What does all this mean for the world economy? The latest IMF forecast is, for once, overly-optimistic: 0.5% growth in the rich world and 6% in developing countries. Or around 2% globally. This is likely to be revised downward fast. Can it go negative? It could. The unfolding crisis is affecting a larger number of countries and, coupled with slowing economies, may have amplifying effects. If the world goes negative growth in 2009, it would be the first time in a long while. Hold on to your seats.