Economic growth worldwide has slowed in 2008 because to some degree, high oil prices and recession in the U.S. have affected most industrial countries. Although the global economy will probably manage to avoid a recession, it is unlikely to improve in 2009 after a year of uncertainty in financial markets and escalating commodity prices.
Cooler performance in the U.S.—the single biggest national economy—hasn't shut down other countries the way it often did in the past. But weak conditions in the U.S., together with higher commodity prices, have nonetheless started to squeeze economies abroad in varying degree. Despite fears of recession and sharp swings in oil prices and financial markets, the global economy will grow 3% in 2008 and 2.8% in 2009, below the 3.8% average over the last four years.
Although the American slowdown is not as severe as it has been in most prior cycles, it will still sting. Countries that are net exporters of commodities are likely to be best positioned to withstand the pain.
Standard — Poor's Ratings Services believes the current U.S. slowdown is less critical than it would have been 10 years ago, partly because Asia's rise and an improving picture in other emerging economies have reduced overall dependence on the U.S. as the global growth leader. Even if the U.S. is demonstrated to have slipped into recession (as we think it has already done), industrialized and emerging countries will likely keep growing in 2008, though most will do so more slowly. Signs of a sharper slowdown in other regions have appeared. Even with high oil prices starting to subside, a protracted slowdown in the U.S., along with continued financial turmoil, will affect most of the world.
Emerging markets and commodity-intensive countries are providing regional support, but a reduction in exports has started to hinder their growth. Domestic demand and regional strength—large factors in determining how other economies fare during the U.S. slump—have shown at least some effect. For instance the industrialized countries, more closely tied to U.S. fortunes and dependent on commodity imports, have not seen a boost from heavier consumer spending at home, which they require to minimize the damage.
U.S. Growth Is Likely To Dip
U.S. economic growth in the second quarter of 2008 was deceptively robust, though we expect that this was merely a temporary respite and we suspect more danger lies ahead. After a soft 0.9% bump in the first quarter of 2008, real gross domestic product increased a solid 3.3% in the second quarter as monetary and fiscal stimuli kicked in. However, now that Americans have spent their tax rebate checks, the U.S. will likely slip back into recession. Standard — Poor's expects GDP to drop at the end of 2008, bottom out in the first quarter of 2009, and thereafter show signs of recovery. We expect it to rise 1.8% this year, slightly less than in 2007. However, U.S. growth is unlikely to improve in 2009, decelerating to just 0.8% in 2009. And the odds of an actual recession have risen to 80%.
But even if a recession doesn't officially occur, conditions will feel like one to most Americans. That's because housing will likely keep depressing expansion through 2009. We expect housing starts and sales to bottom out this year, though home prices won't reach their lowest point until late 2009. The longer-term outlook remains upbeat, however, with growth probably returning to 3% by the second half of next year.
Oil prices have fallen recently, though a major disruption in supply could still push prices up toward $200 a barrel, thereby derailing the recovery. American reliance on foreign capital is also a major pitfall. Although the current account deficit has improved from its record high in 2006, the current gap still stands at 5% of GDP. Private money was almost entirely financing the shortfall—and at very low interest rates. Now, as foreign investors have lost confidence in American securities and the U.S. dollar, money is not so easy to come by. Investor fears abroad about American credit risk and the threat of a declining dollar have increased dramatically. The result could be both a sharp drop in the dollar and a sharp rise in U.S. interest rates, extending the recession.
It is unlikely that foreign central banks would allow this. They intervened to slow the dollar's fall in 2007, though not as vigorously as they had in 2003 and early 2004. They didn't do that to help the U.S. financial markets, but rather to protect their own countries' trade surpluses, which depend on bilateral surpluses with the U.S. More importantly, foreign and U.S. investors have panicked about credit risk since last year, sharply increasing borrowing costs. Because of the U.S. subprime mortgage problems and related instabilities in the international capital and financial markets, central banks have taken dramatic action to stabilize global markets. The U.S. has moved to a more complete—and expensive—solution, still in progress.