Forecast - Lowest World GDP Growth Since 2003
Leading trade credit insurer Euler Hermes ACI has issued its 2008 Global Risk Analysis Report for emerging economies. The report is calling for lower global GDP growth and reduced world trade volumes for the year.
World: Expect world GDP growth of around 3% in 2008 (3.8% in 2007), the lowest since 2003, with the U.S. at just 1.5% (2.2% 2007), Japan 1.5% (1.9% 2007) and Euro-zone 2% (2.6% 2007). Moreover, the risks are largely to the downside. Expect further monetary easing, but inflationary pressure to limit its scope and the upside when recovery begins. Nonetheless, expect inflation to ease, helped by lower commodity prices, though energy supply shocks remain a threat. Emerging economies generally are better placed to weather the downturn than previously, and will provide some cushion, but have by no means de-coupled. Expect economic policies and stable government to be under closer scrutiny. World trade growth will be 5-6% (average 8.1% 2004-07). Expect the slowdown to increase trade tensions and the influence of sovereign wealth funds. Politically, the Iran nuclear issue remains live and the Middle East generally the most potent flashpoint.
Asia: Expect lower growth in 2008 (8%) though the region should fare better than in 2000-01 (the previous marked global slowdown). Expect China's growth to slow noticeably, as export demand eases, though domestic demand should retain momentum. Expect India's growth to slow to 8% and ASEAN's to 5.2%. Pakistan's President Musharraf relinquished his military leadership and attempted to restore an electoral schedule, but stability was further disrupted by opposition leader Benazir Bhutto's assassination and South Asia faces an uncertain 2008. Expect cross-straits relations to dominate Taiwan's Q1 elections. Thailand's end-2007 general election is unlikely to herald stable government, indeed stresses may intensify if military-installed institutions undermine the poll results. Kazakhstan was the first emerging market seriously impacted by the credit market crisis, with banks unable to roll over ST loans, but should have sufficient resources to come through.
Latin America: Though more resilient than before to the global credit market crisis and U.S. slowdown—a reflection of stronger external balances and better debt dynamics—the region will not be immune, especially if commodity prices fall. Expect growth to slow to 4.1% in 2008 (after 5.4% 2007). Inflationary pressures though set to ease, limit the scope for monetary easing. Mexico's growth may drop below 3% and Brazil's to 4.3%. High inflation is the key challenge facing Argentina's new president, also in Venezuela where President Chavez suffered his first electoral setback over constitutional change to further his radical agenda. Other radical leaders are having mixed success. In Ecuador the new constitutional assembly has dismissed congress, but Bolivia's government has collided with regions seeking greater autonomy. Expect the U.S. slowdown to hit tourism and remittances with knock-on effects for growth in Central America and the Caribbean.
Central and Eastern Europe: Regional growth is forecast to slow to about 5.3% in 2008 from 6.5% in 2007, owing to less benign external conditions. Several countries face increased external liquidity risk, notably the Baltic states, Romania, Bulgaria and Ukraine, as recently strong growth has been driven by rapid domestic demand that has been fuelled by unsustainably large-scale foreign borrowing, raising concerns about overheating and a hard landing in the wake of tightening global liquidity. Hungary and Turkey, where prudent economic policies have had initial success in tackling economic imbalances but have also slowed growth, may manage a soft landing but remain vulnerable to further external shocks. Russia will elect a new president in March, but expect policy continuity as well as the business environment to remain difficult. Ukraine has a new government, but expect continued political uncertainty while a 38% price increase for Russian gas threatens economic stability.
Middle East: Despite peace talks in Annapolis (USA) at end-2007, a high risk profile remains, not least because of developments in Iran, Iraq and Lebanon. In 2008 terrorist attacks are unlikely to abate, although oil production, tourist revenues and workers' remittances are likely to remain largely unaffected by such incidents. Expect regional growth in 2008 of 4-5% (5%+ in 2007). Focus in 2008 is likely to shift to curtailing inflationary pressures, partly through currency regime adjustments, with intensifying calls for other GCC countries in particular, to follow Kuwait's lead and either abandon their dollar pegs or revalue against a weakened USD. However, this would entail a significant write-down in dollar-denominated assets of those countries, so they may choose to sit tight. Relatively diversified economies, including the UAE, should do well in 2008, though the oil and gas sectors will continue to dominate the regional economy.
Africa: Expect regional GDP growth to dip below 5% in 2008 for the first time since 2003, as the global environment and commodity demand weakens. Nonetheless, recent gains reflect sound policy implementation, structural reforms and institutional improvements, as well as the commodity boom and debt relief. Accordingly, the region is better positioned to withstand a global downturn. In addition, expect FDI (particularly from Asia) to remain firm. Angola, Egypt, Tanzania, Zambia and South Africa are likely to continue to do well. In South Africa, leadership change of the ANC is unlikely to result in significant short-term policy re-direction. Flashpoints continue in Sudan, Somalia and Zimbabwe. Violence following Kenyan presidential elections indicates regional unease with democratic transitions. The outlook for some economies, including Burkina Faso, has improved following substantial debt relief.
Source: Euler Hermes ACI
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