Kamis, 28 Februari 2008

By Karl Brown
Ongoing turbulence in financial markets as investors reassess the creditworthiness of their own, and their counter-parties' portfolios has dampened the outlook for the global economy in 2008. The strong performance in many countries in the first three quarters of 2007 will likely result in the global economy expanding by just above 5%.

The hesitancy to extend credit is occurring despite a high level of liquidity in the global financial system. In fact, central banks have been flooding funds into the system to keep financial markets functioning, which has kept global liquidity growing. However, uncertainty about what's lurking on balance sheets has investors largely sitting on this liquidity. This has pumped up market volatility, weighed on stock markets and produced a widening in credit spreads. The TED spread, which measures the difference between the three-month Eurodollar rate

and the three-month Treasury bill rate, remains elevated and longer-dated credit spreads are wider, signaling investors' preference for safer government-backed paper.

Most important for the global economic outlook is whether or not the widening in credit spreads and commensurate tightening in lending conditions will persist and materially affect the pace of consumer and business spending in the quarters ahead. Expect global growth to ease in 2008 to 4.8% on the back of tighter credit conditions. The aggressive action by central banks to inject liquidity into financing markets to ensure that they continue to function combined with steady-to-lower official interest rates are expected to limit the impact of credit market tightening on the global economy.

Experts expect a sharp slowing in the pace of growth into 2008 as the tightening in credit conditions curbs consumer and business spending. The Fed's senior loans officer survey showed that banks tightened lending standards for both residential and commercial real estate loans as well as inching conditions tighter for some types of consumer loans. Experts say the softer spending rates combined with a continued contraction in the housing market will significantly slow the pace of GDP growth to about 1.5% during this period despite ongoing support from the net trade sector.

Experts say the U.S. housing market remains the Achilles' heel for the economy and financial
markets. As yet, there have been limited signs that the correction is abating. The stock of unsold homes stands near record-high levels as home sales remain weak. In response, housing starts fell late 2007 to the lowest level since 1993 and were down 48% from their recent high. We are projecting another double-digit decline in residential investment in the fourth quarter. Declines will continue in 2008, although the magnitude will ease through the year.

After growing at an average rate of 3.6% during the past six years, experts expect consumer spending to moderate in 2008 but still record a solid 3.2% increase, backed by the strong labor market and rising wages. The moderation will also be tempered by the one percentage-point cut in the GST rate on January 1, 2008. Experts say the unemployment rate hit a fresh 33-year low in September and remained there through November. The economy generated 388,000 new jobs in the first 11 months of 2007 and more than two million jobs in the past six years, 82% of which were full-time and 86% in the services industries. Wage growth has also picked up pace, with average hourly earnings for permanent employees up 4.1% from a year earlier in the three months ending November 2007.

The economy may or may not be heading for a recession.The government has cut the prime rate by 3/4 of a point. They decided to act now, rather than later to try to cushion the economy. A couple of more cuts and the whole country can refinance. Banks probably will now. The rebate checks supposedly going out to millions of Americans will help some,but experts are optimistic. Consumers may not use the money to pump up the economy, but rather pay for other things like household bills. Personally, I will use mine to buy heating oil as it has doubled in price since 2004.
Learn more about this author, Karl Brown.

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