International Macroeconomics
Highlights
Credit Crunch Watch:
The financial stress indicator edged down further in the latest week and is now at its lowest level since the end of February, but it remains very high by historic standards and is far from signalling that conditions have “normalised”. The market is now anticipating that the Fed Funds rate will not go below 2%, and so monetary conditions may not become any more stimulative.
2 May 2008
Payrolls underline near term growth risks in the US– but extra stimulus to prompt recovery
Incoming data for the US over the last month has again proved weak, leading to our US growth forecast for this year to be revised down to 1.4%. Payrolls fell by a steep 230k in Q1 – typically such falls signal a sustained period of falling employment. Near-term risks for the US economy are severe and the economy could deteriorate further over the coming months, but the Fed and the US government stand ready to act to ensure the US does not slip into a prolonged slump. Outside the US, financial strains are being felt most in the UK, especially in the housing market, and growth in the UK is likely to remain below trend for the next year, despite interest rates falling to 4.5% by end-2008.
14 April 2008
Could inflation choke off a recovery from the credit crunch?
Our baseline forecast shows a short sharp impact from the credit crunch, with growth recovering into 2009 as the impact of monetary and fiscal stimulus in the US is felt and credit market problems fade. We see two main downside scenarios – an extended credit crunch and renewed global inflation. In an extended credit crunch, credit conditions remain tight for a prolonged period and policy ineffective, pushing the US into a deep recession. In the renewed global inflation scenario, recovery in 2008H2 is accompanied by high inflation feeding through to wage inflation and a significant rise in inflation expectations, necessitating much higher interest rates, which choke off the economic recovery. Consumer spending and growth are hit hard and business confidence and investment are undermined. With persistent inflation pressure limiting the policy response, the net result is a recession which is deeper and more drawn out than the extended credit crunch.
1 April 2008
New Country Briefings
We are publishing new on-line briefings every day covering economic and political developments and prospects in over 175 countries, linked to our forecast databank. View example briefs: