Macro-Economic Outlook 2008

Not so long ago the prospect of $100 oil and a sinking dollar where the preserve of doom mongers but as we move into 2008 it seems that is exactly the reality that confronts us. Dealing with these issues will not be easy and a tough year lies ahead but with policymakers seeming alert to the problems and emerging markets still in ascendance things may not be quite so bleak.

Industrialized economies will still be squirming in the first half of 2008 following losses from the US sub prime debacle but prompt and aggressive action by policy makers has provided the necessary liquidity tonic to restore stability and I would expect a return to form by the second half of 2008 with adjusted growth rates.

Surging food and energy prices, boosted by increasing demand from emerging markets provide inflationary risks which will curb policymaker’s ability to trim interest rates aggressively should markets take another hit. This constraint is likely to soften in the second half as supply in oil catches up with demand.

Half of world growth since 2000 has come from emerging markets, this trend is set to accelerate with liquidity infusions from the likes of sovereign wealth fund investments into the US and EU thus staving-off liquidity problems in those regions.

A run on the dollar would be in nobody’s interest but it is quite likely that exchange rate appreciation will be tolerated as it provides solutions for everybody in the long-term. Taking heat out of inflated Asian asset markets and major oil producers whilst boosting growth in industrialized economies by lifting export competitiveness.

While there are substantial risks, particularly if the credit pendulum swings back too far during the correction this seems unlikely to signal a full-blown global recession. Barring the unexpected and exceptional the sky is unlikely too fall in 2008 and economic activity from emerging economies are likely to lift the developed world out of the gloom.

UK

Although displaying strong growth in the mid half of 2007 the UK is likely to fall back in line during 2008 with an expected GDP of 2% as the lagged effects of earlier rate hikes take their toll. Expect consumer spending to slow as higher mortgage rates and increased tax burdens squeeze family budgets with house prices flat over the next 12 to 18 months. Prospects for exporters look firm as sterling moves to a 4 year low against the Euro, which accounts for about half of UK exports. The economy is very exposed to macro-economic uncertainties however and upward movements in interest rates could be problematic.

Eurozone

Despite strong performance in the last six years up until mid 2007 a decline in confidence has set in with some leakage from the US housing market however the Eurozone markets are benefiting from strong growth in the emerging markets in Eastern Europe and structural changes in German labour markets. Thus after a soft period in the first half of the year I would expect some improvement in the later stages. Currency fluctuations on a trade-weighted basis are not as harmful as they may appear and exports are likely to remain solid with ECB rates on-hold for the year.

Asia

A very different picture to US/Eurozone with high growth likely to continue with overheating and inflation being the major risks. In spite of slowing export markets internal demand is likely to take up the slack, particularly as substantial government reserves allow increases in public spending. India is likely to slow growth slightly as earlier rate rises take an effect with policy makers likely to have an eye on inflation. Japan will continue its recovery, albeit more slowly in the first half going on escape deflationary pressures by the end of the year.

US

The US has difficult terrain to navigate through 2008 with returning to normality being the main item on the agenda. Robust trade performance aided by a competitive dollar should cushion the blow but is unlikely to lift it out of sub-trend growth. Housing markets problems will be substantial but are unlikely to be fatal due to the aggressive policy adopted by the FED.

Update :

The best technology outlook article I’ve read (read that last paragraph).