World Economic Pace Slows

July 10, 2008
Global Insights' revised forecast projects slower growth.

Global Insight has revised its forecast for 2008, projecting US real gross domestic product (GDP) growth will decrease to a mere 1.36%. Imports to the US could turn negative for the first time since the 2001 recession. The impact of the US economic situation will also affect the growth rate of world real GDP, bringing it to 3.07% in 2008.

The financial crisis created by the subprime mortgage crisis has yet to spread to more countries whose financial institutions had either directly or indirectly invested in the US mortgage market. This crisis will negatively affect these countries’ economies, making their economic growth even lower than what is currently forecast. The result is that international trade could be even further depressed.

Private consumption in the US is likely to inch up 0.83%, which is hardly in keeping with population growth. The low levels of private consumption are likely to cause a marked decrease in the demand for imports. As a result, US real imports are expected to drop by 1.79% in 2008.

Comparing the current US recession and the recession in 2001, an obvious difference is that the 2001 recession was caused by the burst of IT bubbles. In 2000, the economy was still booming, and imports grew at a recored rate. In contrast, the current recession is a gradual emergence of a financial crisis created by the inflated housing market and the subprime mortgage crisis.

US economic growth had already started to slow by 2007 and import growth slid to its lowest growth rate since 2002. In 2008, the US economy and imports will continue to experience down-side pressure. They will gradually deteriorate in the first half of the year. This will allow households and firms to adjust their consumption, investment and production and gives time to policy-makers to take rescue measures. Therefore, it is likely the current US economic recession will not be as deep as the one in 2001 and the United States might not cut back on imports as much as it did in 2001.

Countries whose exports rely more on the US market will be affected even more by the US recession. Mexico’s exports rely on the US market more than any other country. More than 50% of Mexico’s exports to the US are machinery and motor vehicles and parts. In nominal terms, in 2007, more than 80% of Mexico’s exports relied on the US market.

In 2007, the United States was the world’s third largest exporter, accounting for 8.5% of the world exports. Countries that mainly supply the US with capital goods and luxury consumer goods and whose currencies have appreciated against the US dollar have been hurt by the current US recession.

The majority of China’s exports to the US are low-cost consumer goods. Since China has restricted the appreciation of its currency, China’s exports to the US will be hurt the least among the top five exporting countries.

Global Insight provides economic, financial, and political coverage of countries, regions, and industries —covering over 200 countries and spanning more than approximately 170 industries—using a unique combination of expertise, models, data, and software within a common analytical framework to support planning and decision making. The company has 700 employees, and 25 offices in 14 countries covering North and South America, Europe, Africa, the Middle East, and Asia.