In its latest Global Economic Outlook, Fitch Ratings updates its forecasts for GDP in 2009 which have been revised downwards very sharply, reflecting the abrupt fall in activity and trade at the end of last year, evidence of much more rapid deleveraging by the US household sector, and precipitous declines in business investment. This is not only the widest but now also the deepest global recession experienced since WWII. Nevertheless Fitch still expects a return to positive, albeit, weak, growth in 2010 in response to unprecedented fiscal and monetary policy stimulus.

The global recession is proving much deeper than anticipated. Economic activity and trade declined very abruptly in the last three months of 2008 with the scale and synchronicity of the downturn in industrial production in the advanced economies unmatched by anything seen since the first oil shock in the early 1970s. A widespread collapse in consumer and business confidence in the wake of the intensification of the global banking crisis likely played an important role, alongside a dislocation in the process of trade finance.

While Fitch does not expect the pace of decline witnessed in 08Q4 to continue on a sustained basis there are as yet few concrete signs of improvement in 09Q1. Many of the key drivers of the downturn remain in place. Most significantly US households are de-leveraging and retrenching at a more rapid pace than witnessed at any time since WWII in response to a sharp acceleration in job losses, declines in asset prices and tight credit conditions. In combination with sharp cut backs in corporate spending and ongoing declines in residential investment, US GDP is now expected to fall by 3.4% this year - the steepest 'peace-time' recession since 1938 - and unemployment is forecast to reach 10% next year.

Long-standing concerns about global imbalances have come to the fore as the heavy reliance of many of the world's 'producer oriented' economies on US consumers as a source of final demand has been starkly revealed. The biggest downward revisions to the growth outlook have actually been for Germany and Japan - where GDP is expected to fall by 3.7% and 6.7% respectively - and parts of East Asia, countries where exposure to tighter credit conditions is low.

But very few countries appear to be sheltered. As prospects for final demand have weakened, credit availability has deteriorated and capacity utilisation rates have fallen to record lows, companies are slashing investment plans aggressively. Fitch is forecasting double-digit declines in business investment in most advanced economies in 2009. Along with sharp rises in unemployment, this is significantly amplifying the impact of adjustments in consumer spending and housing investment. While growth in the largest emerging markets - Brazil, Russia, India and China (BRICs) - is expected to remain positive at 3.2%, many emerging markets are being severely affected by the decline in world trade, commodity prices and capital flows. World GDP is forecast to decline by 2.7% this year.

Against this dire backdrop, governments and central banks in the advanced economies are in the process of implementing unprecedented macroeconomic policy stimulus. The combination of fiscal policy easing, interest rate cuts and monetary expansion surpasses anything seen in the post war period. And it certainly contrasts starkly with policies followed after the 1929 stock market crash when tight US monetary policies and the widespread use of the gold standard exacerbated global deflationary and recessionary pressures. Alongside large-scale government intervention to stabilise financial sector, Fitch judges that policy stimulus, helped by the impact of weaker commodity prices on consumer incomes will spur a mild recovery from around the end of the year.

The largest emerging markets should also be a source of stability once growth starts to recover in the major economies. Nevertheless the forecast global recovery in 2010 is to a rate well below trend, implying a further rise in unemployment, and for some economies including the UK and Spain deleveraging is expected to keep growth particularly low in 2010.