'The global economy is set to slow significantly, and the downside risks to the world economic outlook remain elevated, according to the latest report from the Economist Intelligence Unit's Country Risk service. This reflects not just the problems in American and European financial sectors, but also higher global inflationary pressures, which are eroding corporate competitiveness, crimping consumers' spending power and casting a shadow over growth prospects in many countries. Pakistan was the biggest loser in August, with record rates of inflation, slowing real GDP growth, increasing monetisation of a ballooning fiscal deficit and a burgeoning current-account deficit, which has led to a rapid drawdown of foreign-exchange reserves.
The report forecasts a slowdown in growth in emerging markets, rather than a downturn, although parts of emerging Asia, the Middle East and eastern Europe appear vulnerable. Emerging-market credit fundamentals will remain generally strong, and few countries are vulnerable to the kind of financial crises that marred the second half of the 1990s. Any problems with debt servicing are likely to be encountered by emerging-market corporates and financials, rather than sovereigns. But there is a 30% probability that the developed world will experience a deep recession. Should that happen, growth will be markedly lower in emerging markets, leaving them more exposed to financial stress.'
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