ECONOMIC PREDICTIONS FOR 2008 - by Nariman Behravesh
The U.S. economy is now in the danger zone. GDP growth in the fourth quarter of 2007 (0.0%) and first half of 2008 (0.8% in the first quarter and 1.8% in the second quarter) is expected to be very weak. This will make the United States extremely vulnerable to another shock. Furthermore, it is unlikely that the rest of the world will be able to shrug off the expected sharp deceleration in spending by American households. Global Insight currently predicts that world growth will be 3.3% in 2008, compared with 3.7% this year. With the potential for housing crunches in some European economies and a post-Olympics slowdown (or even bust) in China, the risks for the global economy are now overwhelmingly on the downside.
While the dollar has been on a downward trend since 2002 (mostly because of the huge current-account deficit), the recent weakness is a function of fears over the subprime crisis and a U.S. recession, combined with expectations that the Fed will cut interest rates more than other central banks. As the economy begins to recover in the second half of 2008 and early 2009, though, sentiments on the dollar will turn more positive, at least against some currencies. We expect that the euro will top out around $1.55 next summer and fall to $1.49 by year-end. The Canadian dollar may have peaked already, if oil prices keep falling. However, both the Japanese yen and the Chinese renminbi should keep appreciating vis-à-vis the dollar, given the large current-account surpluses in both economies. Global Insight has raised the probability of a U.S. recession from 35% to 40%.
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