The global economy remains at substantial risk, but the speed and size of the various governmental rescue efforts bode well for a recovery in the not-too-distant future, according to the Deloitte Touche Tohmatsu Global Economic Outlook fourth quarter report.

Written by five Deloitte global economists, it predicts that, although developed country economies will continue their serious downturns, the massive infusion of government money should restore activity to the credit markets and set the stage for recovery. Emerging countries will feel the negative effects of this downturn.

The report looks at the historical precedent of financial crises in Norway, Finland, Sweden, and Japan in the 1990s, as well as the United States during the savings and loan crisis. It suggests that bank recapitalisation can be beneficial to economies and that the financial burden on taxpayers is not necessarily onerous. Yet the report also notes that economic downturns triggered by financial crises tend to be deeper and longer than those that start for other reasons.

"Unlike some past financial crises, this one resulted in a rapid and massive governmental response on both sides of the Atlantic," said Dr Ira Kalish, Director of Global Economics, Deloitte Research. "Thus, there are reasons we can be cautiously optimistic about the medium-term outlook for the global economy."

The report offers a long-term view, suggesting impacts in multiple business sectors. "The credit crunch is part of a long-term restructuring of the economy," said Dr. Kalish. "The result will see a shift in the US economy away from a consumer-driven import base to an export-based economy. Asia on the other hand, will develop as more consumer-based economies. This creates opportunities and challenges for business across industry sectors."

"In the United States, recapitalisation of banks will help to revive credit market activity," continued Dr Kalish. "Eurozone banking consolidation will have a positive long-term impact on European capital market efficiency. Finally, the emerging economies of Russia, India, and China, while slowing, will remain important drivers of global growth.

"Once economic recovery resumes, inflation will be a significant challenge in many countries, with some like India and China already walking a tightrope. The longer it takes for countries like these to address inflation, the more difficult it will be to suppress future inflationary pressures."

Offering a closer look at the impact of the volatile price of oil, Dr Kalish said: "A drop in oil price could partially offset the negative impact of the credit crisis. However, relatively elevated oil prices will negatively impact production."

In China, the outlook is hazy, according to the report, with GDP slowing and the Chinese government balancing as best it can both rising inflation and slowing growth.

India faces slower growth, the report adds, saying longer term, the outlook will depend on the government's ability to invest in infrastructure.

"In Japan, our best guess is that the downturn will be short-lived and the recovery will be relatively robust," say the analysts.

"This report is meant to provide a strategic perspective about the economy for the business community," explained Dr Kalish. "In the current environment, it is important for companies in both developed and emerging countries to understand the risks they face and the potential impact on their business strategies."

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