The global economy is set for a tough time over the next 18 months as the US economy is slipping into recession and the US housing market slump continues longer than expected, Fitch Ratings, an international ratings agency, said in its Global Economic Outlook report.
“US economic growth declined to 0.2 per cent [not annualised] in the fourth quarter of last year but recent data pointed to the likelihood of recession in the first half of 2008.
“Consumer spending and confidence have weakened, the labour market has deteriorated sharply, declines in housing activity and prices are proving to be deeper and more durable than expected, and credit conditions faced by household and corporate borrowers have tightened rapidly,” Fitch said.
The report finds that despite the prevalent credit crisis woes, the global economy will grow faster this year than in 2001, thanks to the economic resilience of Bric and other emerging markets.
Fitch estimated that credit losses on US sub-prime mortgages could balloon to $240 billion (Dh880bn) with the bulk of the losses being absorbed by financial institutions in the major advanced economies (MAEs).
The US economy is, however, expected to show some recovery in the second half of 2008, driven mainly by macroeconomic policy easing. Fitch hopes that the $120bn tax cuts “which are scheduled to be implemented in May” will boost household disposable income growth by 1.2 per cent.
The report finds that consumer confidence is deteriorating in the MAEs following the credit crisis. But the impact of credit crisis on macroeconomic front is not clear as yet. “In the US, UK, France and Spain confidence is now at its lowest level since at least the early to mid-1990s, pointing to concerns about the outlook for income and jobs,” the report said.
Fitch said global inflation is projected at 3.7 per cent, the highest since 1999, while it would hover just under three per cent in the MAEs this year, which would be the highest rate since 1992.
The volatility of global commodity prices is complicating the US inflation outlook and sharpening the distinction between domestic and external inflationary pressures. However, if global energy prices stabilise or fall from current levels “which seems the most likely outcome” headline inflation will decline later in 2008. Moreover, the projected slowdown in the economy should exert dollar-inflationary pressure over the next 18 months.
Fitch’s analysis suggests that the decline in activity below potential GDP in 2008 and 2009 should reduce inflation by 0.4 per cent in 2008 and a further 0.7 per cent in 2009.
Moreover, US private non-residential investment growth “which grew by seven per cent in the year to the fourth quarter of last year” should hold up better than in 2001. Corporate sector finances are healthier with lower debt [as a percentage of GDP] and debt service ratios and ample balance sheet liquidity.
With corporate borrowing remaining dynamic through 2007 and banks‚ prime lending rates declining in line with the federal funds rate, corporate spending should be supported by monetary policy easing.
Despite tighter credit conditions and weakening business sentiment and orders, Fitch Ratings expects private non-residential investment to expand by three per cent in 2008.
However, the Japanese economy expanded by 0.9 per cent in the fourth quarter of 2007, resulting in an annual growth rate of 2.1 per cent.
The eurozone area posted another strong year of growth at 2.6 per cent in 2007 but it slowed towards the end of the year and Fitch expects growth to decline to 1.7 per cent this year.
Bric economies to grow eight per cent
Fitch expects the Brazil, Russia, India and China (Bric) economies to grow robustly at eight per cent in 2008, albeit down from 9.4 per cent in 2007.
While Brazil is the slowest growing in the Bric, its GDP growth rose to 5.4 per cent in 2007 up from 3.7 per cent in 2006. Growth has been well supported by rising consumption and investment, thanks to interest rate cuts. Investor and consumer optimism has also been boosted by the commodity price windfall, the appreciation of the currency and enhanced credibility of macroeconomic policies.
Brazil’s economy should continue to be cushioned from the impact of the global slowdown by low trade openness, a favourable commodity prices outlook along with still robust credit growth, with Fitch expecting GDP growth to slow to 4.3 per cent in 2008.
Fitch forecasts robust GDP growth of eight per cent in Russia this year, albeit down somewhat from 8.1 per cent in 2007.
The Russian private sector has borrowed aggressively in the international markets in recent years but 2008 is likely to see a marked slowdown in capital inflows.
Fitch forecasts India’s growth to remain strong at eight per cent for the fiscal year ending March 2009, albeit slower than the estimated 8.7 per cent in the previous year.
In the near term, growth is forecast to slow on the back of the slackening global economy, the appreciating rupee and the impact of earlier monetary policy tightening. Signs of Indian economy overheating are present and inflation is forecast to remain high for this year.
Fitch expects China’s GDP growth to slow to less than 10 per cent this year for the first time since 2002. The trade surplus is forecast to remain large in absolute terms, at more than $300 billion (Dh1.1 trillion), but to decline as a share of GDP and in terms of its contribution to GDP growth.
GDP Growth in the BRICs
% 2007 2008f 2009f
Brazil 5.4 4.3 4.1
Russia 8.1 7.0 6.0
India 8.7 8.0 8.5
China 11.4 9.7 10.0
Global growth rate to be below three per cent