Wednesday, February 20th 2008
Key changes since January 10th 2008
- The Economist Intelligence Unit has revised down its US GDP growth
forecast for 2008 to 0.8% , from 1.5% in its January 10th assumptions.
We also expect a slower rebound in the US in 2009 and have downgraded
GDP growth for the year to 1.4%, from 2% previously. The main
contributing factors for the downgrade are the accelerated deterioration
in the housing market (with commercial construction now also weakening)
and the deepening woes in the financial sector. We also believe that the
process of balance-sheet adjustment in the financial sector will last
this year and into 2009.
- We have also made revisions to our monetary policy assumptions for
the US and now expect the Federal Reserve (Fed, the US central bank) to
have cut the target for the fed funds rate to 2.25% by end-2008, with
the majority of the cuts set to come in the first quarter. Policy will
be tightened in 2009. The disinflationary impact of the financial market
crisis and the housing slump should give the Fed room for policy
manoeuvre in the short term.
- We have also revised down euro zone growth for 2008-09 to reflect the
assumed negative impact of the US downturn on global financial markets
and trade. We maintain, however, our forecast for the US dollar against
the euro, reflecting our view that US economic weakness has already been
broadly factored in by the markets. There is, however, a high risk of
volatility. We have made a slight upward revision to our forecast for
the yen to reflect a slightly faster unwinding of carry trade activity
than previously assumed. Japanese growth has been revised up modestly to
reflect the impact of the strong GDP outturn in the fourth quarter of
2007, but the outlook for Japan remains uncertain.
- Despite the US slowdown, our forecast for global commodities remains
broadly unchanged. We continue to forecast that oil prices will average
US$79.5/barrel in 2008 and US$72/b in 2009. Further demand growth from
the emerging markets will ensure the global supply side remains
stretched, and continued geopolitical risks and investor activity will
maintain upward pressure on prices.
