At the time of writing we have just witnessed a number of financial sector earthquakes with the collapse of Lehman Brothers and the US government's $85 billion support for AIG. But at the same time oil moved below $90 a barrel, which raises a real possibility that some might think the worst is over.

Perhaps the appropriate question is whether these events mark what might be described as the end of the first phase of a wider-spread economic downturn, or the last. I fear that 2009 is going to be worse than 2008 given the lag in the deteriorating economic environment feeding through into corporate and consumer behaviour.

In early September the chief economist at the International Monetary Fund stated that "the global economy was facing its most difficult situation in many years". A week or so later British Airways chief executive Willie Walsh described the outlook for the airline industry as a crisis that would be "deep and protracted". From a personal perspective this is now the fourth cycle I have witnessed and this time it appears that it will have a two-phase downturn - first the result of higher costs (chiefly fuel) and secondly a more normal revenue decline as the economic slowdown kicks in.

Although the focus of attention has been on the US, where production in August was described as having plummeted, and Europe, in particular the UK, where the economy is described as "extremely weak" and where the figures at best can be described as bad, other parts of the world face pressures too. In mid-September, the Asian Development Bank issued what appears to be a pretty clear warning of changes ahead in "developing Asia". Here, overall growth is forecast to decline from 9% in 2007 to closer to 7% in 2009 - still a significant rate of growth, but there are marked variations.

While growth in both China and India is forecast to hold up well, the economy in Hong Kong by 2009 is forecast to be growing at a rate of 4.5% compared with 6.4% in 2007, and Singapore at 4.2% in 2009 compared with 7.7% in 2007. The greater concern in Asia appears to be inflation, which is expected to rise from 4.8% in 2007 to peak at 7.8% in 2008 and be close to 6.0% in 2009. Slowing growth and inflation began to emerge as an issue almost a year ago.

Clearly not all regions or countries are seeing the same factors at work to the same degree. The real challenge facing a number of governments is to re-establish economic growth at the same time as controlling inflation. Where inflation is caused by excess demand bidding up prices, the need would be to increase interest rates which would act to slow economic growth. However, in a number of key markets it looks increasingly as though inflation is now being pushed by higher commodity costs.

In the US and UK at least, while market attention is focused on whether the key interest rates will be cut, there is the question of whether it would have any impact on corporate and consumer behaviour. As things stand although it would reduce borrowing costs, it is unlikely to have an impact in the short-term on spending behaviour.

From a corporate perspective, the budgets for 2009 are being finalised and one of the easiest to cut is the travel budget. At a market level the turmoil on Wall Street and in the City of London does not bode well for transatlantic premium traffic.

Data and its interpretation will have an important bearing on near-term consumer or corporate behaviour, but it is too early to predict the turning points for the economy or the airline industry. The real issue now is the nature of the adjustment process to the new, more difficult environment and this is neither instant, costless, nor painless.

Source: Airline Business