This edition of the World Economic Outlook explores how a dramatic escalation of the financial crisis in September 2008 provoked an unprecedented contraction of activity and trade, despite active policy responses. It presents economic projections for 2009 and 2010, and also looks beyond the current crisis, considering factors that will shape the landscape of the global economy over the medium term, as businesses and households seek to repair the damage. The analysis also outlines the difficult policy challenges presented by the overwhelming imperative to take all steps necessary to restore financial stability and revive the global economy, and the longer-run need for national actions to be mutually supporting. The first of two analytical chapters, "What Kind of Economic Recovery?" explores the shape of the eventual recovery. The second, "The Transmission of Financial Stress from Advanced to Emerging and Developing Economies," focuses on the role of external financial linkages and financial stress in transmitting economic shocks.
This chapter discusses how the global crisis is affecting the various regions of the global economy. The United States is at the epicenter of the crisis, and is in the midst of a severe recession that has resulted from a squeeze on credit, sharp falls in housing and equity prices, and high uncertainty. These three shocks are to varying degrees also affecting the rest of the world. Asia had little exposure to U.S. mortgage-related assets but is being badly affected by the slump in global trade, given its heavy dependence on manufacturing exports. In Europe, as in the United States, the financial system has been dealt a heavy blow, housing corrections are intensifying, and industrial production is being hit by the sharp drop in durables demand. Because of their heavy reliance on capital inflows to sustain income growth in order to catch up to Western levels, both the emerging European and Commonwealth of Independent States (CIS) economies are suffering heavily, with the slump in commodity prices adding to the pain in many CIS economies. In Latin America and the Caribbean, the fallout from the crisis is moving through both trade and financial channels, intensified by the drop in commodity prices. The Middle Eastern economies are suffering mainly because of the decline in energy prices, and hard-won gains in African economies are threatened by slumping commodity prices and potentially lower aid inflows.
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