United States
The US economic growth is expected to remain steady in 2008, inflation is predicted to decline next year, and the unemployment rate is forecasted to rise through 2008, according to the participants at the Federal Reserve Bank of Chicago’s Economic Outlook Symposium. The consensus outlook shows that real gross domestic product (GDP) is forecasted to increase 2.5 per cent in 2008. Inflation, as measured by the Consumer Price Index, is expected to moderate to 2.6 in 2008 after rising 3.6 percent last year. The unemployment rate is forecasted to rise to five per cent by the end of next year from 4.7 per cent last year, suggesting that overall growth in the economy is somewhat below potential.
All major components of real GDP are expected to contribute to the softening expected in economic growth. Most major real GDP components are anticipated to continue expanding in 2008, albeit at a slower pace than in 2007. The drag from the housing sector is forecasted to moderate. In particular, the consensus outlook shows residential investment is expected to decrease by four per cent in 2008. Light vehicle sales will decline to 16 million units in 2008. Oil prices are expected to decline by the end of 2008, after jumping just above $90 in the final quarter of 2007.
Additionally, real personal consumption expenditures are projected to stay constant at 2.5 per cent in the coming year. Housing starts are expected to drop from 1.35 million units in 2007 to 1.21 million units in 2008. Industrial production growth is forecasted to ease from a 2.6 per cent increase in 2007 to a 2.5 per cent increase next year. Short-term interest rates are expected to rise 17 basis points in 2008, while long-term rates are predicted to increase 30 basis points over the same time period. The trade-weighted dollar is expected to edge lower in 2008.
Many economists predict that America will move closest to a downturn since the current expansion began seven years ago. If the economy does contract, economic seers expect a shallow retrenchment, most likely in the first six months of the year. Most see only limited improvement in the latter half. A lagging economy is likely to have wide ramifications. In the heat of a presidential election year, unemployment would start to rise, making the economy a major issue for the candidates. An anemic economy would also present a challenge to the Federal Reserve Board, which might opt to keep cutting interest rates.
Soft economic numbers, moreover, could have a detrimental effect on corporate profits – depressing financial markets and lowering tax receipts, straining government budgets. Behind the dim forecasts for this year are some of the same factors that beset the US economy this year: stress in the housing market and relatively high oil prices. These twin problems will, in 2008, finally get to the consumer according to some other economists. Consumer spending in 2008 will slow to a 1.8 per cent pace, but it could be below one per cent. The first half will feel like a recession for consumers.
Unlike some previous years, the economy will have little momentum leading into 2008. Retail analysts believe holiday sales rose by no more than 4 percent, one of the slowest rate increases since 2002. As was the case this year, one of the strongest head winds buffeting the economy will be problems in the housing market, economists say. Sales of new homes are expected to continue to fall as builders try to shed inventory. Few forecasters expect to see home prices rise, or even stabilize, next year. Instead, estimates of a further decline in value range from 3-6 per cent.
If the national trends showed housing prices falling 8-10 per cent, that would be enough to send US into a recession. The manufacturing segment of the economy is already in a recession. Manufacturing production is estimated to have fallen two per cent in the last quarter of 2007. Auto sales are poor. Wood products, furniture, glass, hardware is all declining. There is now a snowballing on the downside that is dragging down other markets.
Losses in the banking system will stifle the economy. With an estimated $200 billion in losses in the housing arena, the banks need to increase their reserves. This could reduce the availability of money for new loans. The banking system is very fragile right now. Economists expect that the Federal Reserve will continue to cut interest rates because of recession concerns. The Fed's next meeting is Jan. 29 and 30. The computer models at Standard & Poor's indicate that the price of a barrel of oil should fall by about $20 to the neighborhood of $75.
China
China might see a "significant dent" in its economic growth rate, if the US economy slides into a recession, according to the recently released United Nations report. The country is expected to grow at a robust pace of 10 per cent in 2008, moderating from the 11.4 per cent growth estimated for 2007.The report also considered a more pessimistic scenario under which housing prices in the United States make a more significant dive and push the US economy into a recession in 2008. Should this happen, economic growth in China would drop below 8 percent in 2008.
However, the UN's prospects for the Chinese economy in 2008 remain positive overall. Fixed investment continues to be a key growth driver. Private consumption, which was relatively weak in the past compared with other components of GDP, will strengthen due to a strong growth in wages and the positive wealth effects from the significant rise in stock prices over the past two years. The weight of the Chinese economy in the world has been steadily increasing. China contributed about 17 percent to global growth in 2007, about the same as the United States.
China's trade with the rest of the world has been growing three times as fast as the world average since its accession to the WTO in 2001. If it keeps up the momentum, China will become the largest exporting economy in 2009. Rapid industrialization has generated strong spill-over effects on the economic development of other developing countries, contributing directly to their exceptionally strong growth performance in recent years.
China's increased demand for raw materials has sustained the upward trend in primary commodity prices, which determine an important part of export revenues of many developing countries. Import demand for iron ore increased by more than 40 per cent, copper by more than 100 per cent and edible vegetable oils by about 80 percent during 2007. China has also stepped up its efforts to strengthen South-South economic cooperation through trade agreements, increased direct foreign investment, and development assistance and debt relief, in particular with the least developed countries.
China has disbursed multi-billion dollars in preferential loans to encourage Chinese enterprises to invest in ASEAN countries, and created a multi-billion dollars China-Africa Development Fund to stimulate Chinese investment. It has also promised to double its assistance to Africa in 2009. The aid is targeted mainly at energy, telecommunications and transportation, which have by and large been neglected by the traditional, OECD country donors. The financial support is highly concentrated in a small number of oil-and-mineral-exporting countries, and most of the aid is provided in kind by Chinese companies, using inputs of Chinese origin, including labor.
China's RMB appreciated by more than six per cent against dollar during 2007, but China's surplus in its current account surged further, to about 300 billion dollars. With a surplus in both its current account and capital account, China has accumulated more than $1.4 trillion in official foreign reserves. The UN report said China's large current account surplus should be seen in the broader context of the problem of the global macroeconomic imbalances involving the huge external deficit of the US counterbalanced by surpluses elsewhere, including China. These imbalances can not be resolved unilaterally or bilaterally.
China's inflation rate hit a new 11-year high of 6.9 per cent last November, prompting the government to take a series of measures, including subsidizing pig breeders and oil makers, to fight price hikes. PRC’s inflation is estimated to be 3.8 per cent in 2008 against the previous forecast of 2.2 per cent. Rising global grain prices and a pig disease outbreak led to sharply higher food prices, but this is expected to ease paving the way for the implementation of planned reforms in the pricing of state-controlled sectors such as water, power and natural gas. Significantly higher than expected inflation, however, poses a risk to the outlook. The Chinese government, however, has decided to take measures to stabilise market prices and increase the severity of punishments for those guilty of driving up prices through hoarding or cheating.
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