World economy will shrink in 2009

World real economy began to shrink rapidly. Annualized growth rates of real GDP in 2008 4Q were -6.2% in US , -5.8% in Euro and -12.7% in Japan. Japan and NIEs like Korea and Taiwan fell deeper than the US, the originator of the financial crisis. Every advanced country marked one of the biggest declines. The correction of US over consumption brought the severest shrinkage to exporting countries of automobiles and electronics products to the US. The inventory adjustment of these products still continues. Therefore, the decline in 2009 1Q is expected to be as bad as or even worse than 2008 4Q. The emerging countries, even China, could not escape from the negative impact. China fell into recession, though still keeps positive growth.

Fall of demand leads to decrease in production and employment. It reduces consumption. And it decreases production and employment again. This is "spiral shrinkage of the real economy". In this crisis, the shrinkage of real economy has damaged balance sheets of financial institutions and made credit crunch more severe. This is another spiral shrinkage between real economy and financial economy. The situation may not fall into Great Depression like 1930s. However, there is still possibility to fall into small depression. It is impossible to come out of both spiral shrinkages without government's intervention.

Governments of each country announced financial stability plans and economic stimulative packages. However, so far, only the Chinese packages started to show the effects. The packages of the US is expected to pull up the demands in April. The packages of Europe and Japan will help stop downward spiral in the second half of 2009. The economic shrinkage in advanced countries would stop in the second half of 2009 at the earliest, and the economy would hit the bottom in 2010. Even if the packages bring good effects, it takes a few years for financial systems to recover to the standard level. The growth rate of world economy in 2009 will be negative, - 0.8%, for the first time since 1980 when IMF started to record the statistics. The growth rate of advanced countries in 2010 is expected to be mere 0.3%, L-shaped gradual recovery is expected. The world economy in 2010 is expected to grow by 2.1% which is less than 3% which divides good and bad times. Recession is expected to continue in 2010.

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