International Economic Outlook

NORTH AMERICA AND EUROPE TIP TO A MINI-SLOWDOWN I. GLOBAL ASSESSMENT AND OUTLOOK Following incredible growth performance during the expansionary phase of the global business cycle, major economies led by the United States appear to have entered uneven slowing down patterns from their cyclical peaks reached in the fall of 2007. The latest evidence from quarterly national accounts suggests that economic growth continued to be strong in the third quarter of 2007. The combined output of the member countries of the Organization for Economic Cooperation and Development (OECD)-the 30 richest economies in the world-was estimated to have grown at an annual rate of 2.9 percent from a year ago, compared with 2.5 percent in the second quarter of 2007. On a y ear-over-year basis, in the third quarter of 2007 real output expanded by 2.8 percent in the United States and by 2.9 percent in the 27-country European Union. The two major European economies of the United Kingdom and Germany posted solid gains in output growth of 3.3 and 2.5 percent, respectively. Recent economic activity indicators from emerging Asia, an important driver of the global upswing, also continued to be strong, particularly from the fast growing populous countries of China and India. In the third quarter of 2007, Chinese real output expanded by 11.5 percent, and India's industrial production was reported to have jumped by 8.2 percent in comparison to the same quarter a year ago. Neither the extent nor the timing of the current global slowdown have been well identified yet because of the lag in the availability of national accounts data on the fourth quarter. The assessment of the recent situation by businesses and policy makers relies on monthly data. In the United States, several leading indicators and consumer confidence indices are falling to cyclical lows pointing to a substantial economic slowdown or even a recession. Similarly, in the Euro Area, leading indicators and diffusion indices for businesses and consumers have been falling, a signal of deterioration in European economic conditions. The expected slowdown has its roots in a fresh acceleration in defaults in the United States sub-prime mortgage market, which is a small segment of the overall mortgage market. However, sub-prime loans were passed on to other financial institutions and were mixed with different loans or receivables into intricate financial products, such as collateralized debt obligations (CDOs). Thus the risks have been distributed around the globe. The expected disparities in the economic weakening among countries have further increased uncertainty and, consequently, instability in the financial markets. The cyclical factors of the leading and/or lagging relationships of investment, profits, consumer expenditures, and inventories have substantially contributed to the changing pattern of the global cycle. Investment-led growth has been characteristic of the recent economic boom. Will investment growth stagnate, at least temporarily? Declines in investment, caused by a profits slowdown and/or unrealistic and unsustainable high investment levels have serious consequences on overall economic activity and may lead to significant economic weakening and even recessions. About 700 business executives from around the world recently have provided input to answer this question. Business experts from 12 major economies, which account for 77 percent of the world's GDP, evaluated their country's investment activity to have increased in the last quarter of 2007, compared to the same quarter in 2006, except in the United States, the country that triggered the global distress. (see Table 1) When the business executives were asked to anticipate investment spending in the next two quarters, they forecasted declines from current levels in the United States again and also in Mexico, the Euro Area, and the United Kingdom. Given the accommodating stance of central banks to the mounting financial turmoil, the baseline forecast scenario calls for a short-lived substantial economic slowdown in the United States in the first half of 2008, with one of the two quarters registering a negative growth rate in real output. …