How World Growth Will Withstand the U.S. Recession
U.S. downturns used to flatten the planet. This one hurts the world economy, but growth in China will thwart global recession. Here's why
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.
However, business conditions could continue to worsen and bring about a much harder landing in the U.S. than we currently expect. That would increase recession risk abroad.
How Canada, Europe, Japan, and Australia Are Faring
In Canada, after a midyear pickup, we expect economic growth to decelerate to 1.2% this year, much less than the 3% average of recent years. Shrinking exports will likely weaken overall growth as a strong Canadian dollar and soft growth for Canada's major trading partners stymie demand. Business investment and consumer spending, which have supported the economy in recent years, have begun to slow.
Australian economic activity has hit the skids recently amid weak consumer confidence and spending, a drop in business confidence, softening labor market conditions, and a contracting housing market. But strong prices for Australian commodities will help the country avoid a recession.
European economic growth will likely slip to 1.5% in 2008, more than 1 percentage point lower than last year's 2.7%. Accelerated retail price inflation and surging commodity prices are likely to diminish consumer spending.
Japan's near-term economic prospects are weak for 2008 and 2009 after seven years of expansion. Higher commodity prices will likely erode corporate profits. The corporate sector is pushing down wages. Higher oil and food prices have already taken their toll on consumers' spending power.
Although Europe and Japan face hurdles, economic growth in both will outpace that of the U.S. in 2009. For Japan, this will be the first growth year since 2001. However, Europe and Japan, which together constitute about one-quarter of the world's GDP, contributed just 12% to worldwide GDP growth in 2006—the same contribution as the U.S. made alone.
China and Developing Asia Spread Growth
The international community will feel the effects of a U.S. recession and a slowdown in Europe, but several regions are well prepared to withstand less favorable global conditions. Much of the fastest growth continues to be in the developing Asian economies, especially China and India.
One beneficiary of outsize growth in China and India is Australia, where demand for resources from its Asian neighbors will help counter weakness in the U.S. Although Australia's economic activity has recently slowed more sharply than expected, economic conditions for Australia's regional neighbors remain fundamentally sound and broadly supportive of Australia's growth outlook. In particular, the commodity-intensive nature of China's development will help support Australia's resource industry.
Japan and South Korea have been able to rely on China's rapid growth for some insulation from the U.S. economic slowdown. Regardless, growth has slowed in both economies. Projections are for Japan's GDP growth in fiscal 2008 to be 0.7%, slowed by higher commodity and food prices, as well as by a weaker global economy. Though the drop is less severe, we expect that the Korean economy will grow 4.3% in 2008, after 5.0% growth in 2007.
For the Asia-Pacific region as a whole, the recovery from the 1997 Asian currency crisis has been stronger than we expected, though not all countries have rebounded equally. The key risk this year is whether the U.S. growth slowdown will deepen or lengthen, leading to a broader slump in Asia.
The Global Growth Shakeup Will Continue
World growth has slowed in response to recession in the U.S. and higher energy prices. Overall, the challenges to the world's economies in 2008 are expected to continue into 2009. Even though the U.S. doesn't dominate the world economy as it once did, the American slowdown still can shake up the world economy. The global economy may not be falling in response to the U.S. stumble, but it does have to slow down to regain its balance.
Bovino is a senior economist for Standard & Poor's. |
