Global economy outlook 2008

[leovirgo]

I thought the whole world is growing - both China and India are pull factors. Now someone say US consumers slow down is the major concern. Below is an articel from Telegraph.

Economy faces greatest risks for decades
By Edmund Conway, Economics Editor
Last Updated: 7:05pm GMT 09/01/2008


The world is facing the most potent cocktail of economic and political risks for a decade in the wake of the credit crisis, an authoritative report has warned.

A potential recession in the US and the knock-on effects of a collapse in asset prices, such as housing and shares, could throw the world economy into chaos, says a study from the World Economic Forum.

Britain is more vulnerable to the threat of financial meltdown than almost any other country, since its economy is more reliant on this sector, warned the Global Risks 2008 report.
advertisementThe alert is particularly significant since last year's report flagged up the possibility of a re-pricing of risk in financial markets - the event which sparked the turmoil last summer.

The report - produced together with a collection of insurers and finance experts - also mentioned the possibility of the dollar falling yet further.

David Nadler, vice-chairman at insurers Marsh & McLennan, said: "Systemic financial risk is the most immediate and, from the point of view of economic cost, most severe risk facing the global economy.

"With so many potential consequences of the 2007 liquidity crunch unresolved, the outlook at the beginning of 2008 is more uncertain than it was a year ago. The US Federal Reserve has projected direct losses related to sub-prime of $150bn (£75bn); non-sub-prime financial losses may be considerably greater."

The warning comes a fortnight before the start of the forum's annual conference in Davos, where many of the world's leading politicians, businessmen and academics will meet to discuss the outlook in the years ahead.

Prime Minister Gordon Brown and Chancellor Alistair Darling are among the UK politicians due to visit, as well as Tony Blair, who attended when he was in power.

The report put the chances of a dollar collapse at about 10pc, while the risk of a contraction in major Western economies was about 15pc.
However, while financial turmoil remained the major threat, it said the world also faces a number of other less widely anticipated problems - among them a potential food crisis and possibly explosive problems with companies' supply chains.

Christian Mumenthaler, chief risk officer at Swiss Re, said that with food prices on the rise and the amount of meat and fish available for the rapidly growing world population falling, it was not inconceivable that there could be widespread food riots in the developing world.

The report said that while companies have been boosted by the development of sophisticated and efficient supply chains to transfer goods from one part of a company to another, these links could be more vulnerable to unexpected disruptions than many executives assume.

Among the other risks mentioned were a global pandemic and a further surge in oil prices to levels which start to harm the economy dramatically.

Mr Nadler said: "The global economy has demonstrated remarkable resilience to increases in energy prices since 2004. But the limits of resilience may be close to being reached. Over the next two decades the supply of primary fossil fuel will become tighter with the world economy becoming much more vulnerable to price shocks as a result.

"The report urges better dialogue at all levels - between emerging and developed countries and between the corporate sector and government and regulators. A move towards a forward-looking regulatory framework is needed in order to ensure long-term economic viability. This framework should seek to unlock investment and innovation in cleaner energy and,

 

[TWI]

The US Federal Reserve has projected direct losses related to sub-prime of $150bn (£75bn); non-sub-prime financial losses may be considerably greater

I think you better triple that figure

 

[leovirgo]

Only in US or global losses?

 

[Atilla]

Only in US or global losses?

Here are some fundamental links.

U.S. November Trade Deficit Widens More Than Forecast (Update2)

United States public debt


Does the US budget deficit matter?

Ofcourse it matters. Matters more today than any other day.

Finally, I would question the purchase of Countrywide by Bank of America. If it went bust economy would sink like a brick. I'm sure it's Banks agreeing amongts each other quitely to do something rather than nothing and be impacted.

I don't think the scare stories are really scary but just pure facts. Scary point to me is the lack of belief in the inevitability such that the Fed and people seem to think by cutting interest rates and with floating exchange rates the day of reckoning can be avoided.

Yeah right.

 

[laptop1]

Buy giant bags of rice, wheat germ, lentils and beans, bunch of gold bars. Collected some skills, from books about living in poor countries and poor conditions.Live close to fresh water Ho, buy lots of Cadles, you could even sell these at great prices, that is, if anyone has gold bars to buy them.

If you think about of it, maybe it dont sound to dumb to stock up on the above just in case.:idea:

 

[leovirgo]

Donald Trump calls for a full point cut in interest rate!
Mad Money: Trump: Fed Should Cut a Full Point - Mad Cap Recap - MSNBC.com

 

[leovirgo]

Stephen King: Market convulsions will lead to the return of the state as a major economic force
(Taken from The Independent 28 January 2008)

Even before the latest financial crisis, the political mood was shifting. Concerns about the environment, income distribution and migrant labour were all adding to doubts about the free-market model. Now, though, we may be on the verge of an even bigger change. Having been rolled back over the decades, we are, I think, about to see the return of the state as a major economic force.

Indeed, the financial crisis has already, perhaps inadvertently, led to much bigger state involvement in our economic affairs. As Citigroup, Merrill Lynch and others have sold off chunks of their businesses to the Chinese, the Singaporeans and the Gulf nations, we've begun to recognise that sovereign wealth funds have the ability and the willingness to own big shares of supposedly free-market companies.

This, in turn, raises an obvious question. What if the major shareholders in a company don't fully subscribe to free-market tenets? Years ago, the Thatcher government argued in favour of privatisation because it exposed company managements to capital market discipline. This argument only works, though, if those within the capital markets are interested in maximising their financial returns. It's not clear that all sovereign wealth funds will act in this manner.

If they don't, how should western governments react? The obvious answer is to regulate to ensure that the interests of other stakeholders – consumers, workers and other shareholders – are met. But this, surely, is just another form of state intervention. Regulation is unlikely easily to be able to mimic free-market outcomes – in part, because such outcomes are, for good or bad, unpredictable – so the ultimate result is, presumably, an escalated level of state involvement.

This, though, is probably not the most important consequence stemming from the recent financial market turbulence. In many ways, the involvement of the sovereign wealth funds has been a stroke of good fortune. Banks desperately short of capital might otherwise have had to resort to fire sales of assets and, even worse, rights issues. That, in turn, would have weighed even more heavily on the world's bourses.

No, the biggest consequence, I suspect, is the return of state involvement, whether voluntary or otherwise, in each nation's domestic macroeconomic affairs. Over the last few years, we've got used to the growth of international capital markets, with ever-increasing cross-border capital flows. For a while, this meant that sub-prime households in the US, for example, could borrow indirectly from, say, local councils in Norway. The device linking these seemingly disparate creditors and debtors was, of course, global capital markets and, in particular, the huge growth in recent years of asset-backed securities.

When, however, trust falls out of the bottom of the market, as has happened in recent months, who ultimately is responsible for sorting the problem out? Is it the banks, which originated and then sold off so much toxic paper? Is it the households who shouldn't have borrowed so much in the first place? Or is it the Norwegian local councils and their ilk who perhaps should have been more aware of the risks they were taking when buying increasingly exotic financial products?

The truth, of course, is that while each of these has an interest in finding a solution, none of them, on its own, is probably capable of doing so. The weakness and enhanced volatility of capital markets in recent months has been a consequence of a monumental collapse in levels of trust. Whether it's corporate bonds, asset-backed securities or, more recently, equities, investors no longer see any of these assets as a safe store of value.

Only one group of assets is seen as trustworthy at the moment. Whether in the US, the UK or the eurozone, government bonds are in hot demand. Yields are remarkably low. For a fleeting moment last week, US 10-year Treasury yields dropped to less than 3.3 per cent, a level almost without precedent. No one, these days, is looking for decent returns. They're much more interested in keeping their existing capital safe.

It's for this reason that governments will have a bigger role to play. If government yields are so low, governments can borrow from the capital markets cheaply and easily. Whereas both households and companies are succumbing to the credit crunch, governments have no such constraints. They can readily get access to funds. As a result, they may find themselves playing a much bigger role supporting economic growth.

The Americans already appear to have recognised this turn of events. With remarkable speed, Congress and the Administration have come up with a fiscal package worth over $100bn, enough to add about 1 per cent to economic growth, even though the American fiscal position is nowhere near as healthy as it was ahead of the 2001 downswing. This stimulus plan may not be enough to avoid recession, but it should certainly help to limit the scale of any initial economic contraction. Elsewhere, though, there is no such debate.

Arguably, of course, this reflects America's unique economic problems. The housing market is imploding, unemployment is rising and many of the usual recessionary indicators are flashing red. The same cannot yet be said for the UK or for countries within the eurozone.

It may, though, only be a matter of time. The sub-prime crisis started in America but the systemic risks to the financial system are transatlantic in nature. Failing capital markets carry consequences for economic growth on both sides of the Atlantic, and to pretend otherwise would be foolish.

If, though, we're going to deal with the crisis, a fundamental rethink of the relationship between fiscal policy and the broader economy may be required. Broadly, two arguments favour low and stable budget deficits. First, low deficits are consistent with the maintenance of price stability (the bigger the budget deficit, the bigger the incentive for governments to turn on the printing press to avoid having to raise taxes or cut back on government spending). Second, low deficits provide freedom for the private sector to allocate capital efficiently (because governments cannot be trusted to do so).

Yet these arguments are not universally true. Banking crises tend to be associated with persistent periods of weak demand and, hence, low inflation. And when capital markets fail, their failure is typically the result of earlier periods of inefficient capital allocation (think of the late 1990s dot.com bubble, the Japanese land price bubble of the late 1980s, or America's savings and loans crisis). In other words, there are times when governments really do need to borrow – and borrow in size – if a calamitous economic downswing is to be avoided.

Are we reaching another of those occasions? Quite possibly, yes. American policymakers have already half-admitted this. In other countries, the debate hasn't even started. It must, though, before it's too late.

The UK avoided the last global recession in 2001 largely because of an earlier, fortuitously timed, loosening of fiscal policy. Back then, though, the starting position was a lot better than it is today (see chart): a healthy budget surplus which allowed plenty of room for increases in public spending without breaking the then Chancellor of the Exchequer's golden rule. Now, though, the UK has a big budget deficit. Should Alistair Darling, the current Chancellor, stick to his predecessor's rules? Perhaps, but he should at least know that financial markets would be unusually forgiving were he to decide that the current crisis has rendered those rules defunct.

Stephen King is managing director of economics at HSBC [email protected]

 

[DannyBly]

The latest instalment in the subprime saga: UBS loses $ 18 B subprime mortgage

LONDON (Reuters) - Fresh writeoffs at big European and Japanese banks on Wednesday threw the investor spotlight firmly back onto the credit crunch after days gazing at Societe Generale's stunning losses, which it blames on a junior trader.

Crisis inflicts fresh wounds, UBS cut deepest | Markets | Hot Stocks | Reuters

 

[blancspa]

optimism all the way!

Hi this guy seems to be following Keynesian economics for some time, here is his economic outlook as at 13/05/09 (he seemed to be optimistic since the crisis have started): Can you say what you think?

Farewell deflation: now inflation is the fear
Experts fear interest rates will soar as recovery comes. There are good reasons why that must not be allowed to happen
Anatole Kaletsky

So this is not the Great Depression. The economy is still struggling, house prices still falling and unemployment still rising, but the end of the world has been postponed. As I have argued for the past few months, and as the Bank of England confirmed in its quarterly Inflation Report yesterday, a rerun of the 1930s Depression or even a Japanese-style “lost decade” of stagnation is unlikely, even if economic prospects remain weak.

But as one horror recedes, another looms into view. With economic activity reviving, oil and gold prices rising and central banks printing money like wallpaper, many investors and economists, who only a month ago were panicking about a catastrophe of falling prices, are starting to believe that inflation will bring the sky falling down.

Assuming that signs of recovery continue, as the Bank of England clearly expects despite the Inflation Report's downbeat tone, Mervyn King could soon face pressure to start raising interest rates. Indeed some commentators believe that it is already too late - that by printing huge quantities of money the Bank has guaranteed an inflationary crisis in the years ahead.

As a result, many financial experts are advising borrowers to lock in to fixed-rate mortgages at relatively high interest rates to protect themselves against even higher rates to come. But are increases really inevitable? There are four reasons why the Bank could keep rates in the 0 to 2 per cent range for years ahead - and would be right to do so.

The first is the anti-inflationary impact of spare industrial capacity and unemployment. While unemployment is unlikely to reach the heights of the 1980s, the low level of inflation when this recession started means that wages will stagnate or even fall in the next two or three years.

Meanwhile, there is more excess capacity in most global industries today than at any time since the Second World War, suggesting that businesses will find it hard to put up prices. A few exceptional industries, notably oil, may organise global cartels to raise prices. But such supply inflation should be controlled by trying to break the Opec cartel with higher taxes on consumption rather than by raising interest rates to suppress global growth.

The second reason not to worry about inflation is the way that monetary policy operates. Inflation is caused, in layman's language, by “too much money chasing too few goods”. There will be no shortage of goods in the world economy for the foreseeable future, but if the Bank of England has created “too much money” couldn't inflation result? Yes, but there is no evidence that the expansion of Britain's money supply has gone too far.

While the amount of money created directly by the Bank has expanded by 64 per cent in the past year, this increase in “central bank money” has been largely negated by cuts in credit from private banks. As a result, the “broad money” used by non-financial businesses and households has grown only modestly since 2007.

Meanwhile, the amount of cash and bank deposits that people and businesses want as a protection against sudden changes in economic conditions or cutbacks in the availability of credit has greatly increased. With hindsight, it is clear that Britain has been too dependent on bank credit and that businesses, banks and households held too little ready money in relation to their economic activity and wealth.

To take the simplest example, people who stop using credit cards will need more cash in their daily lives. At a more sophisticated level, banks acknowledge that they should have held a far bigger proportion of assets in cash and Bank of England reserves. If regulators make them do this in the future, the amount of money supplied by the Bank will have to be increased dramatically. So if we assume that many of the changes in financial behaviour that have occurred recently will continue, the Bank will have to provide much more money than it did two years ago to support any given level of economic growth. Consequently, it is far from clear that it should withdraw any of the £125 billion of new money it has created since the start of the credit crunch.

The third reason is connected with the Government's borrowing binge. With public borrowing now running at unsustainable levels, both the Treasury and the Bank of England see reducing government deficits as the priority after the recession. To do this, the Government will have to raise taxes and cut public spending, both of which will curb growth and deflate the economy.

Once the economy recovers enough to withstand some government austerity, it will be much healthier for the tightening to be administered though smaller budget deficits than higher interest rates. But if taxes are raised and spending cut aggressively after the general election, which is both possible and desirable, the Bank would have to be cautious about raising interest rates at the same time. Doing both could tip the economy back into recession. This is a lesson from Japan that Bank officials thoroughly understand. In 1997, after a year of strong recovery, Japan simultaneously raised taxes and reduced the growth of its money supply. The result was a public deficit that expanded, instead of shrinking, as Japan relapsed into recession.

Which brings me to the final reason to expect low interest rates for many years ahead. It is assumed that if British households and businesses decide to save more and cut back on borrowing, the result will be lower growth. But more saving and less borrowing should actually increase long-term growth.

Why then does almost everyone assume that Britain's growth will be slower in the years ahead? Because conventional wisdom confuses supply and demand. If households increase their savings (whether by putting money into their bank accounts, increasing their pension payments or buying shares), this reduces their demand for goods. But assuming that those extra savings don't sit idly, but are lent to businesses that want to expand, supply of goods in the economy will increase.

How is this divergence between supply and demand reconciled? This is where monetary policy comes in. An economy in which the savings propensity has risen permanently will need lower interest rates than in the past. Only by keeping rates low by historic standards, will demand and supply be kept in balance and full employment be maintained. Making sure that demand grows in line with productive capacity is now the main task for British monetary policy - and will be in the years ahead.

 

[Probafix]

The content posted above is really worth a read..

Thanks for sharing!!