Global
2008: The Year of Recoupling
December 19, 2007

By Global Economics Team|

Our baseline outlook points to continued global expansion through 2009, but with a pronounced slowing next year.  Courtesy of the turmoil in global credit markets, and paced by a mild US recession and slower growth in Europe and Japan, we are forecasting a downshift to 4.3% growth in 2008.  While still well above the 45-year growth trend of 3.7%, such an outcome may feel downright sluggish following the 4.9% average pace over the 2003-07 period — the strongest half-decade stretch of global growth on record.  The outcome can hardly be called a soft landing with the US in a recession, however mild, and considerable risks remain.  With policy offsetting, however, we expect a re-acceleration to 4.9% global growth in 2009.

The coming global downshift will likely mask considerable regional disparities.  We expect growth in the industrial world to slow to only 1.4%, while the developing economies, led by China, will hardly miss a beat.  In the US, we expect a credit-cum-housing-induced mild recession to persist through 1H08, and sluggish growth in Japan, the UK and the Eurozone.  But the credit turmoil is becoming global, menacing even weaker growth outside the US.

Critical to the global call is the expected resilience of Asian, LatAm and OPEC economies.  Whether the knock-on effects on exports from China, Mexico, Canada, Japan, and other Asian economies tied to China’s supply chain will overwhelm their increasingly strong domestic demand remains uncertain.  With China tightening into the teeth of this slowdown, the risks are on the downside of this baseline scenario.

As we look ahead to 2008, the asynchronous character of the global economy seems likely to persist.  If global “decoupling” was the key theme for 2007, global “recoupling” may well be the dominant issue for the coming year.  The extent to which markets, policy and economies are linked may also enter the debate, as tighter financial conditions require aggressive and/or unconventional policy responses, such as the one just launched by five central banks to provide market liquidity.  And investors fear that a new wave of inflation may emerge from the booming economies of Asia, OPEC and Latin America.