LOS ALTOS, CA – Aggressive deficit spending, record-low interest rates, consumer subsidies and inventory rebuilding gradually lifted world GDP from a 6.5% annualized rate of contraction during the fourth quarter of 2008 to a strong 4.9% expansion during the first quarter of 2010. However, the impact of those expansive measures has gradually worn off, says Henderson Ventures.

The global economy is now more dependent on the private sector. Consequently, GDP growth rates slowed substantially during the second and third quarters of this year. Economic activity grew 4.1% in the second quarter and only 3.1% in the third quarter, says the research firm.

The firm expects the ongoing global economic deceleration to continue into the first half of 2011.

Emerging economies will be less buoyant because interest rates are being raised in the face of accelerating inflation. In particular, the combination of restrictive economic policies and an appreciated currency will result in a gradual deceleration of Chinese GDP during the next two years. Economic output in China is predicted to grow 9.9% this year, followed by an 8.5% gain in 2011, and an 8.1% advance in 2012.

Although Japan is expected to achieve a 3.5% GDP gain this year, the total value of economic output will still be far below the levels reached in 2007, according to Henderson. Western Europe is faced with similar impediments. Moreover, the continuing sovereign debt crisis and the unwillingness to apply more aggressive monetary and fiscal policies are likely to crimp liquidity and, therefore, economic progress during the next two years. GDP is predicted to grow 1.5% this year, followed by a 2% expansion in 2012.

Overall, the world economy is predicted to slow modestly next year, when a 3.4% expansion is predicted to follow the 3.9% surge in 2010. The economic hangover precipitated by the global financial crisis is expected to have been fully medicated by 2012, when a 3.8% gain is predicted.

Implicit in the Henderson forecast is the absence of a double-dip recession. That, in turn, is predicated on a long-term solution for the European sovereign debt crisis and credible US tax legislation, says the firm.