International Economic Update

Weakening Global Growth, Increasing Inflationary Pressures
April 30, 2008

The International Monetary Fund's baseline projection of global growth for 2008 is 3.7 percent, down from 4.9 percent in 2007. Other analysts also forecast sluggish growth in the advanced economies in 2008 and 2009 (Chart 1). The rapid expansion in the developing world, led by China and India, is expected to soften, but the pace will continue to be strong (Chart 2).

Growth in the euro area weakened to an annualized rate of 1.5 percent in fourth quarter 2007, and analysts forecast a slight decline to 1.4 percent in 2008. The U.K. grew 3.1 percent in 2007, with a marked decline to an annualized rate of 2.5 percent in the fourth quarter. Japan's growth remained relatively strong at 2.1 percent in 2007, supported by increased export demand from Asia and Europe.

In Russia, high oil and commodity prices provided support for real GDP in 2007, but the expansion is expected to weaken in 2008. Growth remains robust in India and China, although both countries are expected to feel the effects of the global economy's slowdown. Recent data indicates a decline in China's growth in the first quarter of 2008.

The overall outlook for the world economy is uncertain. Financial market conditions are expected to remain difficult as subprime- and other structured finance-related losses are gradually exposed and dealt with. In addition, house prices in the U.S., U.K., Ireland, Netherlands, Norway and Spain continue to decline. These risks and uncertainties may extend into 2009, depending on how events unfold and how the governments and the private sectors respond. Historical experience suggests that economic recoveries are slow when a housing slump causes a downturn.

Global Inflation
Rising energy, food and commodities prices have pushed up inflation in the first quarter (Chart 3).

In developing economies, headline inflation reached 7.5 percent by the beginning of 2008, compared with only 3.3 percent in advanced economies (Chart 4). The inflationary gap reflects food's greater weight in the developing countries' consumption bundles and lower inflation targets in the advanced economies. Core inflation rates remain mild for both developing and advanced economies at about 2 percent.

Further Weakening of the Dollar
The downward trend of the dollar against the currencies of major U.S. trading partners continued through the first quarter of 2008. The dollar's depreciation against the euro continues with a record value of $1.601 dollars to the euro registered on April 22, 2008. The dollar steadily depreciated against the British pound in 2007 but has since given back those gains (Chart 5)[1].

The Chinese renminbi has appreciated 15.4 percent against the dollar since July 2005, and the dollar depreciation against the Japanese yen sharpened in 2007 (Chart 6).

The U.S. trade balance has been shrinking, mainly reflecting this depreciation of the dollar. Net exports in the fourth quarter of 2007 were –5 percent of U.S. GDP in nominal terms, up from –6.2 percent at its peak in 2005.

—Edwin Lai and Janet Koech

  1. Following convention, exchange rates for the euro and pound are reported in dollars per foreign currency, and for yen and renminbi in foreign currency per dollar. Therefore, increments in Chart 5 indicate dollar depreciation, and decrements in Chart 6 indicate dollar depreciation.
About the Authors

Lai is a senior research economist and advisor, and Koech is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.


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