USA
The economy is facing strong headwinds, which are exerting a sizeable drag on activity. The financial crisis is resulting in a credit squeeze, declining house prices are putting pressure on household wealth and the sharp increase in commodity prices is eroding workers’ disposable incomes. The response of macroeconomic policy will help to moderate these effects, as will a dynamic external sector which will continue to benefit from the growth of world trade and the weakening of the dollar. After stalling this year, real GDP growth should gradually return to potential next year.
The opening of a substantial output gap and higher unemployment, together with stabilisation of commodity prices, should ease inflationary pressures. Monetary policy should be maintained at the current accommodative stance until the recovery has taken hold, but interest rates should be raised promptly when conditions normalise. Financial market regulation will need to be revised, including by reducing banks’ scope for regulatory arbitrage through developing their activities through off-balance sheet vehicles and by subjecting financial institutions judged to be too inter-connected to be allowed to fail to the same capital adequacy requirements as banks.
According to the UCLA unit economists’ latest report, US economy will likely avoid a formal recession, but its outlook through the end of next year is decidedly “sub-prime” with the deep housing downturn restraining growth to just above one per cent. The popping of the housing bubble, a wounded financial system and increasing inflationary pressures coming from rising commodity prices will keep the economy on a subprime growth path for the next several quarters.
Despite aggressive Federal Reserve interest rate cuts since last September intended to stimulate the US economy, it will post “tepid” average gross domestic product growth rate of 1.2 per cent from the third quarter of 2007 through the fourth quarter of 2009. It also sees the unemployment rate hitting six per cent by the end of next year, up from 5.5 per cent in May.
Both headline and core inflation will remain uncomfortably high over the next several quarters and so the Federal Reserve has ceased cutting interest rates and its next change in policy will be to increase the federal funds rate starting in mid-2009. The economists expect the remainder of this year and 2009 to resemble recoveries from recessions in 1990-91 and 2000-01, each spurred largely by asset price declines, in commercial real estate in the former and stock prices after the Internet bubble burst in the latter.
The housing market’s steep decline -- its worst tumble since the Great Depression, so far wiping out about $3 trillion in home equity -- coupled with gasoline prices topping $4 a gallon argues against a resurgence of brisk consumer spending in the near term. Many economists believe that the $108 billion in tax rebates will certainly help in the third quarter. But the combined effect of the waning effects of the tax rebates and the end of the investment incentives associated with the government’s stimulus package in December, could very well lead to a decline in GDP in the first quarter of 2009.
Growth in consumer spending, financed by the collapse in savings and increased borrowing from abroad may have peaked. The weaker exchange value of the dollar is making it more difficult for the U.S economy to continue to consume more than it produces. Meanwhile, net exports are on the upswing, adding less than one per cent to real GDP growth, but just enough to stave off recession. Most observers now believe that it was the very low real interest rates of that period that set the stage for the housing and credit bubbles that came later.
UCLA unit forecasters also expect tighter regulation of the financial services in place next year after the Federal Reserve’s sponsored rescue of Bear Stearns BSC.N and its opening of its discount window to Wall Street investment banks. They attribute the surge in crude oil prices towards $140 per barrel largely to supply/demand fundamentals and believe that a cyclical erosion of energy price fundamentals is finally underway as the global economy slows.
Meanwhile, the International Monetary Fund has presented a rosier outlook for the US economy this year and next, but said financial sector troubles and rising inflation present challenges to policymakers. It has raised its 2008 forecast for US economy to around 1 per cent and its 2009 estimate to about 0.8 per cent. Below-consensus forecasts released by the IMF in April, predicting 0.5 per cent growth this year and 0.6 per cent next in the US, drew criticism from US officials and even the World Bank. The revisions followed a stronger-than-expected 0.9 per cent growth rate in the first quarter.
The Fund expects growth to remain weak through 2008 and recover gradually next year, in a slower path of growth that is often typical in recoveries. The economy still hasn’t felt the full effect of tight credit conditions and high commodity prices. Recent rate cuts by the Federal Reserve have resulted in a policy that is conducive to an economic recovery. Still, while inflation is expected to remain under control “as commodity prices peak and economic slack rises,” the Fund noted that inflation expectations are already edging higher.
Since it is difficult to reverse a rise in inflation expectations, the Fed may need a “vigorous response” in reversing the recent easing once the economic recovery is firmly in place. In May, US consumer prices posted their highest year-over-year gain since January, at 4.2 per cent. The IMF expects inflation to rise four per cent this year before falling back to two per cent by the end of 2009.
Russia
Currently the growth of the Russian economy depends to a great extent on external factors. This is because raw materials are Russia’s main export. Consequently, the prices of those goods on the international market are of crucial importance. At the same time, Russia is gradually becoming integrated into the international economic community.
Russia’s short-term economic growth has accelerated above its long term trend, defying weak global conditions. In 2007, the economy grew by 8.1 per cent on the heels of high oil prices, robust domestic demand, and strong macroeconomic fundamentals. Preliminary data show even faster real growth in GDP, at 8.7 percent, and industrial production of 6.2 percent for the first quarter of 2008. But inflation is rising, productive capacity is strained, infrastructure constraints are tightening, and real wage increases are outpacing productivity gains. All this suggests that the economy is overheating-that aggregate demand is outpacing long-term productive capacity. Economists are forecasting a 6.5 per cent GDP growth for 2008, while the government is anticipating 7.6 per cent. GDP expanded 7.6 per cent in 2007 to $1.7 trillion. Russia is in the midst of a 10-year economic expansion and could be one of the world’s top economies by 2020. The middle class continues to expand, and personal incomes have risen more than 12 per cent per year, giving consumers more disposable income. Despite the importance of external factors for the Russian economy, the government is now paying more attention to domestic factors. It’s taking steps to diversify the economy and to solve internal problems.
Reducing inflation and tackling the remaining structural reforms are the new government’s key policy challenges. Russia’s Economy Ministry has raised its inflation forecast for 2008 to 9.0-10.5 per cent from 9.0-10.0 percent before. The revised forecast, which is used in budget calculations, sees Russian inflation returning to single digits in 2009, when consumer price growth is forecast at 6.0-7.5 percent.
Russia missed its 2007 inflation target by a wide margin, reversing a lower inflation trend seen in previous years. The government responded with anti-inflation measures such as price controls, anti-monopoly regulation and export duties. Consumer prices grew 6.5 percent from the start of the year to May and annual inflation reached 14.3 per cent in April after 13.3 per cent in March.
The expected drop in energy and metal prices from 2007 to 2009 will cut back on the flow of foreign money. As a result, a current account surplus of $115 billion may turn into a deficit between now and 2009. Annual payments to repay and service external debt will rise from $7 billion to $10 billion. Compared with the more than $70 billion paid from 2005 to 2006, these amounts look insignificant. Currency reserves will grow from $87 billion to $90 billion in 2007 and beyond, reaching almost $400 billion in 2009. Though this possibility is mentioned in government forecasts, experts have called it into question.
Russia’s Gazprom, the supplier of a quarter of Europe’s natural gas, expects the price of crude oil to almost double as the decade draws to a close, taking gas prices with it. It is expected to reach $250/bbl in the foreseeable future. Gas prices for Europe would rise to reflect the cost of crude. Europe’s gas prices are mainly based on long term contracts and tied to price of crude. The comments came as the oil price sat at around $134 a barrel, a few dollars short of last week’s record level.
Gazprom, already the world’s largest gas producer with a stock market value of over $330 billion, expects to triple in size to become a $1 trillion company within seven to 10 years. It will be investing heavily to that effect, with total investments estimated at $30 billion for 2008 and set to rise in the years after that. Gazprom sells the EU around a quarter of its gas and wants to raise this to around a third. Brussels has sought to diversify supplies to avoid over reliance on Russia and improve the security of energy supplies.
By 2020, Gazprom sees about half of its gas production coming from new fields in arctic seas, Yamal peninsula in Western Siberia and the Far East/ About half of gas production will come from new fields on the continental shelf of arctic seas and from the Yamal peninsula in Western Siberia and the Far East.
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