Australia | Nov 16 2006
By Chris Shaw
Since the US housing market turned down a few months ago economists have been revising down estimates for US economic growth, some arguing a recession is likely while others continue to support a soft-landing hypothesis.
Given the dominance of the US in terms of world growth these expectations of a slowing US economy have implications for the global economy, leading to the question of whether the world economy can continue to grow without its major driver contributing.
Westpac says yes, as in the bank’s view global growth should remain at respectable levels even if the US slows down. By respectable the bank is referring to long-term trend growth rates, its forecast for global growth in 2007 currently at 3.7%, against an expectation of 4.7% growth this year.
This forecast incorporates a slowing in US growth from a forecast 3.2% this year to around 2% next year, while the bank points out it expects other regions to return to longer-term trend levels rather than slow significantly. GSJB Were cut its forecasts for the US to 2% earlier this week. Macquarie in contrast is forecasting growth in the US of 2.3%.
Westpac sees the European economy as in the early stages of generating some momentum after having missed much of the global economic expansion of 2003 and 2004. This improvement is allowing the European Central Bank (ECB) to normalise interest rates at the same time as the labour market is strengthening, so Westpac expects a slowing in the region to 1.8% growth next year from around 2.6% this year.
Japan is a similar case, as its economy is expanding organically rather than relying on exports and government spending, which the bank notes has actually been a drag on growth in recent years. Again, a gentle slowing to more sustainable rates is expected, the bank forecasting growth in 2007 of 2.1% against 2.7% this year.
China has been attracting most attention, particularly as the latest data is suggesting of a slowdown in its economy. The bank notes there is a reasonably strong sensitivity in the Chinese economy to conditions in the US, the multiplier put at anything from 1.0-1.5 times. Even allowing for this the bank notes the Chinese have some room in which to inflate their economy, especially as the fiscal deficit continues to narrow. The bank is forecasting a slowdown from 10.3% this year to a still strong 9% next year. Macquarie is again slightly more optimistic at 9.5%.
Other regions in Asia similarly should continue to enjoy solid economic performance, the bank noting domestic demand should stay strong thanks to stimulatory monetary conditions and strong labour markets.
The bank divides emerging economies into two groups, those with energy assets and those without. The former group should continue to grow strongly, in large part thanks to an expansion in infrastructure spending from the windfall of energy exports. The second group will find the going more difficult, but overall the bank doesn’t see emerging economy growth falling far below trend levels.
While a significant US slowdown will impact on the global economy, Macquarie points out the slowdown may in fact be quite shallow. It notes the key leading indicators of the US economy appear to have bottomed in the September quarter and are now moving slightly higher, suggesting a mild global slowdown only.
There remains some downside risk though in the broker’s view, as if economic data continues to be solid in coming months there is more freedom for central banks in Japan and Europe to increase interest rates, which could cause new problems for global growth later in 2007.