Global Economy to Slow in 2007: Asia Emerges as Driving Force

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Many corporations are impacted in some way by the ebb and flow of the global economy. That is why most companies, especially those engaged in global trade, try to anticipate the condition of the global economy when planning financial strategies and forecasting revenues for the upcoming year. The general consensus among economic analysts contacted by Business Credit magazine is that 2007 is likely to see slower growth for global and U.S. economies. The U.S. slowdown is expected to be a drag on the global economy. What is noteworthy is countries with fast-growing economies, such as China and India, are expected to take up some of the slack caused by a U.S. slowdown. China, in particular, is commonly cited as being positioned to eventually eclipse the U.S. as the world's most prominent economic engine of the global economy.

Jay Bryson, Global Economist for Wachovia, points to the International Monetary Fund's (IMF) project of a global GDP growth rate of about 4 percent for 2007. This is down from about 4.75 percent for 2006. As for the U.S. economy, he said, "It's slowing but it's not a complete disaster outside the housing market." Indeed, forecasts for the U.S. economy were lowered as 2006 was coming to a close. Bloomberg.com reported on Nov. 27 a downward revision by the IMF of U.S. GDP growth in 2007 from 2.9 to 2.6 percent. Stephen Leach, Managing Director and Emerging Markets Economist for Citigroup, said at the FCIB Global Conference (www.fcibglobal.com)--held in Coral Cables, Florida this past November--that global GDP has survived high oil prices. "Here we are in probably the strongest GDP global growth in decades and that's with the sharp increases in oil prices," Leach said. Oil price increases have not fueled inflation as in the past. He noted that the old rule in economics was that with every $10 increase in the price of a barrel of oil there would be a .5 percent increase in inflation. "Where is the inflation?" he asked. "Today there is only one country in the world that qualifies as hyper-inflation--Zimbabwe."

Dan North, Chief Economist for Euler-Hermes, offered the most negative predictions for the U.S. economy in 2007. "I'm fairly pessimistic about next year" North said. He expects GDP growth for the U.S. to be 2-2.5 percent in 2007. "That's not a recession, but it's below the growth rate of a non-recessionary period." For a comparison to North's prediction for 2007, the U.S. economy grew at a revised 2.2 percent annual pace in the third quarter of 2006, the Commerce Department reported Nov. 29. North pointed to several major factors that will be a drag on the U.S. economy, such as high energy prices. He also noted that hikes in the federal funds rate by the Federal Reserve would have a dampening effect, despite the fact that in the last three meetings of the Federal Open Market Committee of the U.S. Federal Reserve there was no change in the rate. However, there were interest rate hikes the previous 17 straight meetings of the Fed. North noted that there is a three to five quarter lag in impact from the actions of the Fed, so despite the lack of an increase in the prime interest rate lately, the effects of past increases are still being felt throughout the U.S. economy. Higher interest rates tend to dampen investments and other spending by businesses that could stimulate the economy.

Perhaps the biggest drag on the U.S. economy will be the housing market. While the other economists contacted by Business Credit didn't predict a drastic decline in the housing market, North views it differently. "If you look at any measure of the housing market, the numbers are grim," he said. He noted that year-on-year housing starts are down 22 percent, new and existing home sales are down, and in September 2006, there was a drop in the median price on homes. North said that has happened only five months in the last 35 years. He doesn't view the housing market as bottoming out yet; nor is he expecting a recovery any time soon. …