FYI | Sep 18 2008
By Chris Shaw
According to the Economist’s Intelligence Unit the chances of a recession in the US and a deceleration in global growth in 2009 continue to increase as the global financial crisis continues to unfold.
In the group’s view, the US recession call is more likely, as the continued risk of additional financial failures means credit conditions in that market along with the EU and UK markets will tighten even further. This will flow through to many emerging markets that rely heavily on foreign capital. This has the scope to put even more downward pressure on commodity prices, though the group continues to wait for more information as to how global demand is being impacted by the latest developments.
Having previously forecast US GDP growth of 1.5% in 2008, the group now sees this as coming in at 1.8%, but this will slow significantly in 2009 and growth is expected to be just 0.6% for the full year. This will impact on global growth as measured in purchasing power parity terms, which is now expected to come in at around 3.8% this year and 3.2% next year against 4.8% in 2007.
Reflecting this, the group has trimmed its growth estimates for the EU and Japan, with the former now forecast to grow at 1.3% this year and 0.8% in 2009, while Japan is expected to generate GDP growth of just 0.8% in both years.
While the strength of the recent US dollar rally was a surprise, the current conditions given the latest developments in US financial markets means the group doesn’t expect much in the way of further gains for the currency. A further factor supporting this view is the expectation the US Federal Reserve will cut interest rates at least once before the end of the year on the way to lowering the reference rate to at least 1.5% by early in 2009.
In the emerging markets, the group sees the problem being one of bringing inflationary pressures under control, though the plus side in its view is a number of emerging market economies are in relatively good shape to withstand the current economic turbulence.
Factors that could impact on the group’s view include the global inflation outlook, as it notes pressures here have been intensifying of late. As well, there are question marks as to the sustainability of the economic booms in both China and India. Other factors that could influence include global geopolitical developments and any further worsening of the current crisis beyond what is presently expected.
