Global Growth

The global economic expansion has begun to moderate in response to continuing financial turbulence. The global economy grew strongly in the first half of CY2007, with growth running above 5%. Recent data suggest that global growth slowed markedly in the final quarter of CY2007, in the face of significant head wind from the financial sector, following a stronger-than-expected third quarter. The financial market strains originating in the US sub prime sector and associated losses on bank balance sheets have intensified, while the recent steep sell-off in global equity markets reflected rising uncertainty.

Global growth is projected to decelerate from 4.9% in 2007 to 4.1% in 2008 (by IMF), a markdown of 0.3% point relative to the October 2007 World Economic Outlook. Global output growth has averaged 4.9% per year during 2003-07, supported by generally sound fundamentals and strong momentum in emerging market economies. The risks as mentioned above remain in a big way. Additional risks to the outlook include potential inflationary pressures, volatile oil markets, a volatile and falling US dollar and the impact of strong foreign exchange inflows into emerging markets. Looking across major individual countries and regions, we find the following.

In the US, growth averaged 2.25% in the first half of CY2007 as the housing downturn continued to drag the economy. Economic growth in the United States slowed notably in the fourth quarter of CY2007, with recent indicators showing weakening of manufacturing and housing sector activity, employment and consumption. Projected growth in the US in 2008 has been lowered to 1.5% on a year-on-year basis, down from 2.25% in 2007. The downside risks to US domestic demand have clearly risen over the past year. Against this background, risks of a recession have risen, although the Federal Reserve has been quick to respond by easing monetary policy and the more likely outcome would seem to be a more prolonged period of sub-potential growth.

All the lights are flashing red said the chief economist at Global Insight in Lexington, Massachusetts, in an interview with Bloomberg Television. The U.S economy is in a recession and the massive job cuts are the evidence. There is no doubt about it at this point. Treasury notes soared after the report on concern that the weakening labor market, combined with lower home prices, higher fuel bills and a global credit squeeze will force consumers to further reduce spending. Minutes before the figures were released, the Fed said it will expand two short-term auctions this month to $100 billion to address heightened liquidity pressures in markets.

Among the other advanced economies, growth in the euro area and Japan slowed in the second quarter of CY2007 after two quarters of strong gains. In the euro area and Western Europe, not only has growth slowed down but confidence indicators have generally deteriorated. In Japan, growth has been dampened by a tightening in business standards, while consumers and business sentiments has weakened. Projected growth in the euro area in 2008 has been lowered to 1.6% on a year-on-year basis, down from 2.6% in 2007. Projected growth in Japan in 2008 has been lowered to 1.5% on a year-on-year basis from 1.9% in 2007.

Growth in emerging Asia remains exceptionally rapid in the first half of CY2007. The regional expansion was led by China, where real GDP grew by 11.5% (year-on-year) in the first half of 2007 as exports and investment accelerated and by India, where gains in domestic demand, particularly investment underpinned 9.25% (year-on-year) growth in the first half of CY2007. The regional economy is now expected to grow by 9.2% in CY2007 and 8.3% in CY2008. Growth in China is projected to decelerate from 11.4% in CY2007 to 10% in CY2008 (year-on-year), while the Indian economy is expected to expand by 8.9% in FY2007-08 and 8.4% in FY2008-09.