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International Economic UpdateApril 4, 2008Global Growth Deceleration ContinuesRecent evidence suggests that the overall outlook for global growth has deteriorated. Activity in most economies is decelerating, and, at the same time, inflationary pressures are rising. The U.S. continues to face increased threats to growth, and other economies are not immune, especially the euro zone and the United Kingdom. Further deceleration is expected for the U.S. and some of its trading partners through the third quarter of this year (Chart 1).
The euro zone's real GDP growth declined from 3 percent in 2006 to 2.8 percent in 2007, and growth is expected to come in between 1.3 and 2.1 percent this year. Spain faces serious problems in its housing sector as well as high unemployment, decreased industrial production and low consumer confidence. Germany's growth remains relatively robust despite fears of a negative impact from the slowdown in the United States. French GDP growth declined in 2007 to 1.9 percent, down from 2.2 percent the previous year, while the U.K., whose GDP growth reached 3.1 percent in 2007, slowed down at the end of the year. As for the other U.S. trading partners, Japan's financial firms' losses more than doubled during the past three months, largely due to their exposure to U.S. subprime mortgages. The Japanese trade surplus shrank in December when exports fell, partly due to weaker consumption in the U.S. and record oil prices. While China and India continue to enjoy robust growth rates, they showed slight dips in the fourth quarter and are expected to grow at slightly lower rates this year. Global inflation fears have been elevated, and some indicators of inflation expectations have risen. Oil and food prices remain significant sources of inflationary pressures. Japanese consumer prices rose by their fastest pace in almost a decade, mainly due to the rising cost of food and energy. In the U.K. these same factors are blamed for the recent inflation increase in February to 2.5 percent from 2.1 percent in December. The story in China is similar, with inflation hitting an 11-year high in February, when snow storms exacerbated rising price pressures, causing food costs to rise 18 percent and elevating the overall inflation rate to 8.7 percent, up from 7.1 percent in January. In February, inflation in the euro zone stood at a record 3.3 percent (Chart 2).
Financial markets remain under considerable stress, and there is some evidence of a tightening of credit conditions in both developed and developing economies. The dollar has reached record lows against key currencies. In 2008 alone, the euro and the yen have appreciated by about 7.5 and 7.9 percent, respectively (Chart 3).
Some countries have recently tightened monetary policy to curb inflation. At its last meeting, the European Central Bank left interest rates unchanged at 4 percent, while the Bank of England cut rates by 25 basis points in February and left them unchanged in March. Japan maintained its interest rate at 0.5 percent, as did India at 6 percent. Australia raised its interest rate to a 12-year high of 7.25 percent in March. Sweden's Central Bank raised rates by 25 basis points to 4.25 percent, while the Bank of Mexico left its rate unchanged at 7.5 percent at its February meeting. —Adriana Z. Fernandez and Janet Koech About the AuthorsFernandez is an economist at the Houston Branch, and Koech is a research analyst in the Research Department at the Federal Reserve Bank of Dallas. |
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