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Description
Defaults on subprime mortgages in the US have triggered jitters in global financial markets over the course of this year, leading to a sharp rise in certain types of risk premia over the summer. The Federal Reserve and the ECB responded by injecting emergency liquidity into money markets, on top of which the Federal Reserve cut interest rates by 50 basis points in September. We expect the recent turbulence to be short-lived, and impacts on the real economy will be limited. We continue to expect global growth of 5.2 per cent this year, with a sharper slowdown in the US offset by persistently strong growth in China and a relatively robust outlook for Europe and Japan--despite disappointing outturns for the second quarter of 2007. Global growth is expected to ease to 4.7 per cent in 2008, reflecting more moderate growth in China and Europe. However, as annual global growth has exceeded 4.5 per cent in only nine years since 1970, global prospects continue to look promising. Risks to the outlook include a further rise in risk premia, which could potentially lead to major banking crises. This would severely restrict both consumer spending and investment, and could bring about a global recession. The impacts may feed through housing markets, if rising mortgage rates and restrictions on lending lead to deeper or more widespread declines in house prices than we have allowed for in our forecast. Some countries will feel the impact of tighter financing conditions more severely than others, and these issues are discussed in a note on pp. 34-41 of this Review. The oil price poses another risk to the outlook, as the price of Brent crude has recently risen to a new peak of $85 per barrel. In response to high prices, OPEC has announced a production increase from November of a modest 0.5 million barrels a day, which should ease supply pressures slightly. But refinery bottlenecks and geopolitical tensions are expected to keep prices from falling below $70 per barrel over the forecast horizon. However, as we have discussed in previous Reviews, the impact of the oil price on global inflation and output is limited, so we do not see this as a serious impediment to the outlook.
Our forecasts for GDP growth and inflation in the major economies are reported in table 1. The downturn in the US housing market has proved deeper and more prolonged than anticipated. In response to losses on subprime mortgages, lending conditions have tightened, delaying the recovery in housing investment. House prices have stagnated and even declined in some areas, and further declines in US house prices are expected next year. We forecast US growth of just 2 per cent this year and 2.2 per cent in 2008. Growth in Japan is expected to remain stable at about 2 per cent per annum 2007-9. While this is slower than many of the other major economies, it reflects growth well above capacity, which is restrained by a declining workforce. Inflation has risen sharply in China in recent months, and we expect this to restrain the outlook going forward, with growth expected to fall below 10 per cent in 2008 for the first time since 2002. Growth in China has been rapid since 1978, driven by exports and supported by a well-managed move to the market. Higher prices should have some rebalancing effect on net trade, easing growth over the forecast horizon. The German economy improved sharply in 2006, when it recorded the strongest growth of the G7 economies. Investment growth has supported domestic demand, while net trade has continued to act as a strong support to activity. The unemployment rate has come down significantly and government finances are in approximate balance. While there is limited scope for further rises in German labour input, the outlook remains healthy. France, on the other hand, is held back by a less favourable outlook for net trade, a high public deficit and little prospect for improvements in the labour market. Spain is expected to slow sharply in 2008, driven... |
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