Bloomberg reported that Goldman Sachs Group Inc cut its forecast for the global economy for the second time in eight days after predicting a deeper recession in Europe. On March 5th 2009, Goldman lowered its 2009 outlook for world gross domestic product to a drop of 0.6% from a 0.2% decline.
Mr Binit Patel economist at Goldman said that "Following the reduction of our Euroland growth forecast to minus 3.6% in 2009, the world economy is now likely to contract by 1% in 2009."
Goldman expects the US economy to shrink 3.2% this year and the UK economy to contract 2.5%. With export demand slumping, industrial output has collapsed across Europe. Production in Germany dropped 7.5% in January from December, the biggest decline since data for a reunified Germany began in 1991. German factory orders plunged 38% from a year earlier.
Goldman predicts that Germany’s economy will contract 5.2% in 2009, twice as much as its previous forecast. France"s economy will shrink by 2.9% and Spain"s by 3.6%. Goldman economists expect unemployment in 6 nation euro region to rise to 10% from 8.2%.
Goldman economists said that "The risks to these forecasts are on the downside. The financial and global nature of the crisis makes unexpected, harmful interactions more likely and could also mute the recovery. In addition, further waves of falling demand and output may bring the risk of deflation into focus. We see the ECB cutting interest rates to 0.5% by end of the summer and engaging in unconventional, quantitative easing in the coming months."
The Federal Reserve has reduced its key rate to a range of zero to 0.25% and the Bank of England has cut its benchmark to 0.5%, the lowest since it was founded in 1694. Both are now using unconventional measures to boost their economies.
The Institute of International Finance predicts the world economy will shrink close to 2% in 2009. The IIF, which represents 380 financial institutions worldwide, has urged governments to pass stimulus measures that will have an immediate effect and said further rate cuts may be necessary.
Finance officials from the Group of 20 nations are meeting to discuss approaches to solving the financial crisis as a rift develops between Europe and the US. European ministers are calling for a focus on tighter regulation, while President Barack Obama is looking for governments to boost spending.