The world’s major advanced economies will next year experience the steepest decline in gross domestic product since World War II, says Fitch Ratings.

Aggregate GDP growth in the United States, United Kingdom, European Union and Japan is expected to be -0.8% in 2009, compared to an estimated 1.1% for 2008.

Tighter credit conditions, consumer retrenchment and falling corporate investment are expected to combine to deliver an unusually synchronised downturn across the advanced economies, the rating agency said.

World GDP will grow by just 1% next year — the slowest rate since the early 1990s — and compared to an average of 3.5% over the last five years, it predicts.

“The combination of recession in developed countries, lower commodity prices and reduced international capital flows will result in a sharp slowdown in growth in emerging markets, though most will avoid outright recession,” Fitch said.

The firm explained that the rapid intensification of the global credit crisis in the last two months and clearer evidence of household retrenchment, declining corporate investment intentions and falling world trade growth explain the sharp deterioration in the outlook since Fitch’s previous Global Economic Outlook was published on July 4. These factors far outweigh the benefits to income growth in the advanced economies from the decline in commodity prices, it noted.

“Recession driven by a contraction in the supply of credit is uncharted territory for the world economy and there are few historical parallels on which to gauge its possible depth or length,” it said.

The firm said that the aggressive expansion of central bank liquidity provision since early September, in combination with major fiscal injections into the U.S. and European banking systems will head off the worst-case scenario of widespread deflation.

“Nevertheless, the process of de-leveraging by households and companies is now underway and this will weigh on spending for some time. Declining asset prices, rising unemployment and job uncertainty will result in higher desired household saving rates, while the deterioration in the cost and availability of household credit will push the adjustment further and faster,” it said. “Business investment is also likely to fall sharply, consistent with its highly pro-cyclical nature as companies anticipate weak final demand and face tough borrowing conditions.”

The recent widening of the credit crisis to emerging markets dampens the prospects of companies in the advanced economies switching sales strategies to the developing world as the U.S. consumer retrenches, it also noted, adding that this will also weigh on investment.

The decline of inflationary pressures from the commodity markets is positive news, Fitch says, as this will allow the European Central Bank and the Bank of England to bring down interest rates rapidly, which will ease the de-leveraging process and help banks’ profitability.

Fitch suggests that fiscal policy will also cushion the shock to growth as governments absorb an increasing share of global liquidity through higher borrowing and inject it back into the economy through tax cuts or higher spending. “Indeed, the macroeconomic policy response, along with the boost to real incomes from lower commodity prices, forms an important part of the expectation for recovery in 2010. This will, however, be to a rate well below that seen in the last five years, when credit was abundant,” it cautions.

IE