World economies
United Kingdom
Britain is sliding inexorably into an economic slump, according to a forecast by consultants at the Centre for Economic and Business Research. The economy looks set for 15 months of recession or stagnation with only slow recovery thereafter. The Centre has slashed its growth forecasts and now expects the economy to expand by just 0.3 per cent in 2009, the lowest figure since 1992. It is calling on the government to take urgent action to re-establish confidence in money markets and for the Bank of England to cut interest rates.
Hopes are rising for an early cut in interest rates to help reduce the cost of borrowing. A growing number of analysts are betting on a cut as soon as next month. However, the time is running out for the government and monetary policy authorities to avoid a prolonged slowdown. Independent economists have massively downgraded their forecasts for the UK economy and now think it will all but grind to a halt next year. The monthly lending figures show that new mortgage approvals slumped to a record low in August. Just 33,000 new loans were approved in July, down 71 per cent from a year ago, and the picture is likely to have been even weaker last month, as rumours that the Treasury was contemplating cutting stamp duty gave buyers another reason to stay away from the estate agents.
Developments over the past few weeks will not have done anything but compound the pressures on the market. The ongoing credit squeeze would continue to hit the housing market, as the economic slowdown took hold. Lenders on both sides of the Atlantic are pinning their hopes on the proposed bailout package from US Treasury Secretary Hank Paulson to restore calm, but analysts warned that it would not put a floor under the housing market. The monthly survey of about 30 institutions shows the average forecast for economic growth for next year is now just 0.3%, down from 0.8 in August and 1.1 per cent in July.
For 2008, which is three-quarters over, the average forecast has slid to 1.1 from 1.4 in August and 1.5 per cent in July. The Office for National Statistics recently revised down its estimate of second-quarter growth this year to zero and many economists expect contraction in the third and fourth quarters as the credit crunch and collapsing housing market crimp the economy hard. Two quarters of negative growth is commonly called a “technical recession” but some of the gloomier pundits are predicting growth will contract in 2009 as a whole.
In its latest economic forecast, the Confederation of British Industry (CBI) predicted a “shallow recession” with the economy shrinking by 0.2 between July and September and a further 0.1 per cent by the end of the year. The CBI cut this year’s growth forecast from 1.7 to 1.1 per cent and said unemployment would likely top two million next year. It also downgraded the 2009 growth forecast by one per cent, predicting the British economy will grow just 0.3 per cent over the 12 months - the lowest rate since 1992. Over the past year our forecasts for economic growth have been shaved lower and lower as the UK economy continues to struggle with the twin impact of higher energy and commodity prices and the credit crunch.
Canada
The Bank of Canada has trimmed its trendsetting interest rate another quarter-point saying Canada needs the stimulus to ward off the headwinds from a United States already in recession and a global economy heading there. The move, following a half-point reduction two weeks ago, drops the bank’s overnight rate to 2.25 per cent, just slightly above the two per cent level it reached four years ago, which it said had given “timely and significant support” to the Canadian economy. But that support won’t translate into strong growth until 2010, it suggested, slashing its growth and inflation projections for this year and next due to a global economic slowdown, financial markets in stress and falling commodity prices.
Three major interrelated developments are having a profound impact on the Canadian economy. First, the intensification of the global financial crisis has led to severe strains in financial markets. The associated need for the global banking sector to continue to reduce leverage will restrain growth for some time. Second, the global economy appears to be heading into a mild recession, led by a US economy already in recession. Third, there have been sharp declines in many commodity prices. The outlook for growth and inflation in Canada is now more uncertain than usual.
The central bank now says Canada’s economy will advance by only 0.6 per cent this year and next year, down from its July projections of one and 2.3 per cent, before recovering to a 3.4 per cent growth rate in 2010. The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports. The recent sizable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. The Canadian dollar fell to a three-year low after it became clear the bank was holding back some of its rate-cutting firepower amid signs global money markets are improving because of massive bank bailouts and liquidity injections.
At the same time, inflation is no longer a worry. With excess supply projected to build throughout 2009 and lower assumed energy prices, inflationary pressures will ease significantly. The bank expects inflation to peak in the third quarter of this year, then fall below one per cent in mid-2009 before returning to the two per cent target by the end of 2010. Core inflation, which strips out volatile items and guides the bank’s rate decisions, will likely stay below two per cent until late 2010, whereas the bank previously saw it returning to target by the second half of 2009.
The Bank of Canada’s principal objective in adjusting interest rates is to keep Canada’s inflation rate within a one-to-three per cent range, and as close to the two per cent target as possible. It now says inflation has ceased to be a significant problem. However, the bank warned of “significant risks” to its outlook on the upside, not just the downside, referring to the possibility that the emergency steps taken by the central bank and the government to boost liquidity and help banks could boost growth more quickly than expected.
The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside. In the face of diminished inflationary pressures, the Bank of Canada lowered its policy interest rate by 50 basis points on 8 October, acting in concert with other major central banks. This extraordinary move brings the cumulative reduction in the overnight rate to 75 basis points since the bank’s last fixed announcement date. These actions provide timely and significant support to the Canadian economy. The cumulative reduction in the bank’s policy rate since last December is now 225 basis points.
The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports. Lower commodity prices will also dampen the outlook, working through deterioration in Canada’s terms of trade to moderate domestic demand growth. The marked tightening in Canadian credit conditions in recent weeks will restrain business and housing investment. The bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth.
Switzerland
Switzerland’s economy is cooling as financial-market turmoil hurts earnings at banks including UBS AG and Credit Suisse Group and a US-led global slowdown weighs on export demand. With the financial-services industry accounting for about 16 per cent of GDP, the Swiss economy is more vulnerable to the global credit crunch sparked by the US housing slump. The SNB along with the world’s largest central banks has injected billions into the financial system to facilitate lending. However, it is difficult to estimate the extent, duration and impact of the international financial crisis at this very moment. The Swiss government said it sees ‘’significantly’’ higher risks to economic growth next year as the credit crunch weighs on a global expansion. A slowdown is already deepening. Manufacturing contracted for the first time in more than three years in September. A gauge of consumption dropped in August and leading economic indicators declined to a five-year low. The economy may slip into a recession early next year. The Swiss National Bank has cut the range of its key three month Libor rate by a quarter of a percentage point to a range of two to three per cent, in an unscheduled move.
The cut in the cost of borrowing comes with a warning that economic growth in the country and its major trading partners will be weaker than expected next year, due to the ‘considerable’ impact of the financial crisis. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. The largest risk to growth, according to economists at Credit Suisse, is the impact on the real economy of tighter credit conditions, which are primarily being felt in the US and Europe. However, foreign trade can be expected to continue to support growth of the US economy next year. Economists at Credit Suisse forecast that the US economy will grow below potential both this year and next. Exports were the cornerstone of the Swiss economic upswing four years ago. However, foreign trade has lost some of its momentum as the economies of Switzerland’s main trading partners (euro zone and the US) have cooled. But exports will probably continue to boost the economy for two reasons.
First, the portfolio of countries that buy Swiss products has been diversified, which has reduced Switzerland’s dependence on individual countries. Approximately five per cent of its exports now go to emerging markets, especially China. Second, high oil prices are benefiting many sectors, such as suppliers for the energy sector, and recyclers of petrodollars. The economists at Credit Suisse expect exports to grow by 3.4 in 2008 and 1.5 per cent in 2009. The medium-term outlook remains sound.
According to the KOF research institute, the Swiss economy is likely to follow other European countries into a brief recession while the Swiss National Bank will try to revive growth by cutting interest rates twice. Swiss gross domestic product will grow by only 0.3 per cent next year, after growth of 1.9 per cent this year. The KOF expects GDP to fall in the fourth quarter of 2008 and the first quarter of 2009, meeting the definition of a technical recession. The KOF forecasts inflation to slow from an average of 2.6 this year to 1.5 in 2009 and 1.3 per cent in 2010, providing the SNB with the leeway to cut interest rates twice over the next six months.
Inflation reached its highest level in 15 years in 2008, largely as a result of the rising cost of crude oil. If prices do not continue to reach new highs, there will be a deflationary effect through at least mid-2009. This is due to the baseline effect: because the price of oil-based products rose almost monthly until they peaked in June 2008, the price difference compared with the same month the year before will decrease. Furthermore, demand-side inflationary pressure will decrease as a result of the economic slowdown. Falling demand will also reduce staff and technical bottlenecks. This lowers the danger that cost increases will be passed on.