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The near-term outlook for the global economy is for somewhat slower growth than in recent years. After five years of 4.75% average growth, global GDP is likely to expand by approximately 4% in 2008. This development primarily reflects slowing momentum in the United States economy in the wake of the sub-prime mortgage crisis, driven by a significant correction in the real estate sector, reduced consumer spending on the back of tighter credit, and inflationary pressures caused by persistently high prices of oil and other commodities. After growing by 2.2% in 2007, the U.S. economy will likely expand by approximately 1.5% in 2008. The Federal Reserve has reacted by cutting interest rates, and the Government, by tax cuts to stimulate the economy. These moves may provide short-term stimulus, but they do not address structural issues in the U.S. economy, such as the low personal savings rate. The U.S. is expected to see growth of around 1.75% in 2009, but unemployment may continue to rise.
In Europe, the strong Euro represents an additional burden. Growth in the Eurozone, at just over 1.5%, will likely be approximately one percentage point lower than in 2007. In Europe’s largest economy, Germany, the high growth rates of the past two years are unlikely to be sustained. After 2.5% in 2007, growth is expected to be nearer 1.5% in 2008 and 2009. In the absence of headwinds from fiscal policy, private consumption – benefiting from further improvements in the labor market – looks set to expand at the same rate as GDP for the first time in six years, making a strong contribution to growth.
The rest of the world will not fully escape the impact of economic slowdown in the U.S. In Asia, Latin America, Eastern Europe and the Middle East, growth in 2008 is forecast to be 0.5 to 0.75 percentage points lower than in 2007. Driven mainly by China and India, however, Asia’s economic momentum will remain strong, thanks to structural progress. Real GDP growth in this region should be roughly 7.75% in 2008, down from 8.25% in 2007.
As a result of rising prices of oil, foodstuffs and other key commodities, inflation was noticeably higher in many industrialized countries at the end of 2007. Inflation exceeded 3% in the Euro-zone and 4% in the U.S. In 2008, price pressures should ease on the back of the economic slowdown. Inflation may, therefore, prevent the European Central Bank from joining the U.S. Federal Reserve on its course of monetary easing.
Risks for the global economy include more significant economic turbulence, sustained difficulties in global financial markets, geopolitical instability, and potential terrorist activities. These could lead to major volatility on the financial markets. Further increases in oil and other commodity prices and a persistence of the real estate and sub-prime mortgage crisis represent further risks to the global economy. These would bring with them the possibility of major dislocations in the financial sector, a recession in the U.S. and, as a result, a more significant weakening of the world economy.
