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Global Chartbook

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August 2008

Thu, Aug 7 2008, 08:53 GMT
by Jay Bryson

Wachovia

Executive Summary

Global Growth Should Slow to Trend in 2008 Before Falling Below in 2009

Global real GDP growth averaged nearly 5 percent per annum between 2004 and 2007, the strongest four-year period of growth in decades. However, real GDP growth rates have slowed in most countries thus far in 2008, and we look for further deceleration ahead. Indeed, global GDP growth should fall below its long-run average next year, making it the slowest year for global growth since 2002. Although global growth should slow further, the probability of a full-blown global recession is rather low because economic fundamentals in many countries, especially in the developing world, are much stronger today than in previous cycles.

The U.S. economy has been struggling for the past few quarters as it works through the fallout from the housing bust and credit market dislocations. That said, a sharp contraction in the U.S. economy has not taken place, at least not yet. Net exports continue to make positive contributions to U.S. GDP growth and macroeconomic policies, which have turned stimulative, are helping to shore up U.S. economic activity. However, overall GDP growth likely will remain weak throughout 2009 as consumers continue to repair their balance sheets. After cutting rates by 325 basis points since September, the Fed likely will remain on hold, at least in the near term, as it assesses prospects for the U.S. economy later this year and in 2009.

Slower growth is starting to show up in other economies as well. For example, economic activity in the United Kingdom is the weakest it has been since 2001, and monthly indicators suggest growth in the Euro-zone slowed significantly in the second quarter. The Japanese economy appears to have stalled, and most large developing countries have not been immune from slower growth.

Why has growth slowed abroad? First, exports to the United States from many countries have weakened. Second, dislocations in credit markets since last summer have weakened growth in countries that are extensively financed via capital markets and/or experienced significant run-ups in house prices. Third, the sharp rise in the price of oil has eaten into real income in many countries, leading to slower growth in consumer spending. Finally, central banks in many countries have tightened monetary policy in response to rising inflation rates that have been engendered by the sharp rise in the price of oil.

Speaking of inflation, we project global inflation will rise from about 4 percent last year to nearly 6 percent in 2008, the highest rate in about 10 years. If there is a silver lining to slower growth, however, it is that inflation in many countries should come down over the course of the year. Sharp increases in oil and food prices have indeed pushed up inflation rates in most countries. However, core inflation rates have generally not risen as much as overall inflation rates. If oil and food prices, which have declined over the past month, do not shoot up again then overall inflation rates should come back down to core rates in the quarters ahead. Although central banks in some developing countries may tighten policy a bit further, we project that central banks in advanced economies will not hike rates. Indeed, some major central banks, notably those in Australia and the United Kingdom, may ease policy by the end of the year.

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Published on  Thu, Aug 7 2008, 08:58 GMT