Mark
United States The economy is facing strong headwinds, which are exerting a sizeable drag on activity. The financial crisis is resulting in a credit squeeze, declining house prices are putting pressure on household wealth and the sharp increase in commodity prices is eroding workers’ disposable incomes. The response of macroeconomic policy will help to moderate these effects, as will a dynamic external sector which will continue to benefit from the growth of world trade and the weakening of the dollar. After stalling this year, real GDP growth should gradually return to potential next year. The opening of a substantial output gap and higher unemployment, together with stabilisation of commodity prices, should ease inflationary pressures.
Japan Although output growth is slowing somewhat, wage gains and a rebound in housing investment should help sustain the expansion in 2008, and growth is projected to pick up during 2009. While headline inflation has risen to about 1% as a result of soaring import prices, underlying inflation is around zero and is expected to pick up only slowly.
Euro Area The economic expansion is likely to moderate during 2008, with a trough in the second quarter. Output growth is being slowed by tighter financial conditions, higher inflation and weaker housing market activity. Growth is expected to drop below potential this year, before picking-up slowly through 2009 as financial headwinds dissipate and the external environment improves. Domestic demand should be underpinned by continued job creation and a modest pick-up in wage growth. Inflation has risen markedly, but is projected to decelerate towards 2% as demand eases and energy and food price effects drop out of the headline measure.
Germany Following weaker activity at the end of 2007, growth picked up strongly at the beginning of the current year. So far, there is little evidence of significant adverse effects on the real economy coming from the financial turmoil, the strong euro or high commodity prices. However, growth is expected to ease over the remainder of this year, mostly on account of slower export growth, before returning to trend in the course of next year. Private consumption is projected to pick up, reflecting the significant growth in disposable income. As the labour market is getting tight, the period of wage moderation is coming to an end.
France After picking up in the first quarter, activity is thought to be softening already in the second quarter and is projected to remain weak in the rest of 2008 and early 2009. The slowdown should help limit further increases in wages and prices, in the face of recent food and energy shocks. The shortfall in the general government financial balance may widen in 2008, before stabilising in 2009.
Italy Economic activity seems to have stalled since the first half of 2007. The weakening external environment and knock-on effects from tighter credit conditions will constrain growth to below its potential rate of around 1¼ per cent this year, while unemployment may rise again. The recent surge in consumer price inflation should fade towards the end of 2008.
United Kingdom GDP growth slowed gradually from an above-trend pace throughout 2007 to an annualised rate of 1.5% in the first quarter of 2008. A further slowing is expected over coming quarters, as both investment and consumer demand are damped by tight credit conditions and housing market weakness. Consumer price inflation has accelerated in recent months and is expected to rise further to above 3½ per cent later this year before falling back to close to the inflation target during 2009.
Canada Economic growth decelerated sharply late in 2007 mainly because of faltering exports and manufacturing output. Growth is projected to remain weak until spring 2009 as US demand stagnates, but no recession is expected. The current account may dip deeper into deficit, and the general government fiscal balance may show a small deficit as well, as both tax cuts and the business cycle eat into government revenues. Economic growth is expected to bounce back in 2009 when credit market difficulties are worked out and the US economy recovers.
Australia After reaching 4% in 2007, economic activity is likely to slow to below 3% in 2008 and 2009 because of tighter financial conditions and the worsening external environment. This should ease pressures on the labour market and bring inflation down to under 3% by the end of 2009.
Austria GDP growth is likely to decelerate in 2008 -- mostly reflecting the lagged effects of a weakening global economic environment and euro appreciation -- before picking up at the end of the year as the world economy recovers. Headline inflation is projected to remain above 2% for most of the projection period, reflecting the pass-through effects of high energy and food prices.
Belgium The economy is projected to remain sluggish through most of 2008, before regaining some speed next year. As a result, the output gap will widen in the near term and employment prospects will weaken. Headline inflation should come down as the effects of recent energy and food price increases dissipate. On the other hand, core inflation will increase as a result of the automatic indexation of wages.
Czech Republic Following three years of growth in excess of 6%, real GDP is expected to decelerate to around 4½ per cent for 2008 before picking up again in 2009. Most of the slowdown is due to a spike in inflation that has squeezed real household disposable incomes.
Denmark Following a marked slowdown, the economy has expanded at a rate close to potential and the pronounced labour and capacity shortages are easing only gradually. Going forward, construction activity is projected to contract and to drag down growth. Export demand is set to weaken, and households are likely to become more cautious when spending.
Finland Output grew briskly in 2007 although there was a notable deceleration in the second half of the year. The pace of activity is expected to moderate further over 2008 on the back of weakening world demand and lower confidence domestically. The recently completed round of wage negotiations has resulted in large wage increases which, coupled with higher import prices, are feeding through to a significant pick-up in inflation.
Greece GDP grew briskly in 2007. Output expanded by 4%, though economic activity slowed during the year reflecting a weakening in domestic demand. The economy is expected to grow by around 3½ per cent in both 2008 and 2009. Headline inflation has jumped but should ease back as the impact of the oil and commodity price hikes wanes. Inflation is likely to remain above the euro area average, however, thus weighing on competitiveness. The current account deficit is set to widen further.
Hungary Growth was weak in 2007, reflecting fiscal consolidation. Though remaining below the trend rate, it is projected to recover in 2008-09, with robust exports favouring investment, while decelerating inflation should support household purchasing power and help consumption. The current account deficit should continue to decline.
Iceland Growth was weak in 2007, reflecting fiscal consolidation. Though remaining below the trend rate, it is projected to recover in 2008-09, with robust exports favouring investment, while decelerating inflation should support household purchasing power and help consumption. The current account deficit should continue to decline.
Ireland GDP growth slowed in the second half of 2007 and is expected to remain well below trend at 1½ per cent in 2008. The housing market continues to adjust, with further sharp reductions in house-building and falling house prices. Domestic demand will stay weak this year and into 2009, but GDP growth should turn around to reach 3¼ per cent in 2009 as the housing construction cycle bottoms out.
Korea After a slowdown in 2008, reflecting weaker external demand and soaring oil prices, output growth is projected to increase to 5% in 2009, thanks to a pick-up in both exports and domestic demand. While rising import prices have pushed inflation above the central bank’s target zone, slower growth in 2008 is likely to damp inflationary pressures.
Luxembourg The economy expanded strongly once again during most of 2007, reflecting strong growth in the financial-services sector. The global financial turmoil has been taking its toll since the end of the year, as investors became more cautious and lower equity prices hit commission fees, weakening activity in 2008. Assuming a gradual normalization of financial markets, growth should return toward potential. Domestic demand is projected to remain relatively strong, boosted by fiscal measures. Unemployment is set to increase, while inflation should remain high as the rapid rise in oil and food prices is likely to feed into core inflation through higher wages.
Mexico After a slowdown in 2008, reflecting weaker external demand, growth is set to pick up to 3.3% in 2009. The approval of the fiscal reform should boost business confidence, underpinning stronger domestic and foreign investment, while the new infrastructure fund is expected to lift public investment. Inflation is projected to remain close to 4% until end-2008, easing back thereafter, and the current account deficit is expected to widen gradually.
Netherlands After enjoying a strong expansion during the past two years, the Dutch economy softened in early 2008, reflecting tighter international financial conditions and slower world trade. Growth should remain moderate in the near term, followed by recovery in the course of 2009, bringing the pace of growth back above potential. Despite the softening of activity, the output gap should remain positive in the near term and widen thereafter. Labour shortages are likely to persist, partly reflecting population ageing, implying that core inflation is expected to edge up.
New Zealand Strong growth, booming commodity prices, tight labour markets and capacity constraints have driven up inflation recently, requiring a very tight monetary policy stance since mid-2007. Real exchange rate appreciation, tight credit and widening credit spreads, together with drought conditions, are provoking slower growth in 2008. A widening output gap should reduce inflation pressure by year-end, allowing monetary policy to be eased and growth to pick up in 2009.
Norway After reaching a peak last year, the growth of activity in mainland Norway is projected to gradually moderate in 2008-09. Wage increases are currently edging up and import prices are no longer declining, both with unfavourable effects for inflation prospects and real incomes. The high level of household gross debt is projected to weigh on private consumption and lead to a higher personal saving ratio.
Poland The rapid pace of economic expansion has continued, fuelled by robust investment and private consumption. The labour market has tightened further, leading to double-digit wage increases. This, combined with soaring fuel and food prices, hikes in regulated tariffs and general excess-demand pressures, has pushed the inflation rate well above the central bank’s target. With enormous real income gains, the economy should continue to expand above potential rates for some time, resulting in a widening current account deficit.
Portugal The expansion, which has been increasingly underpinned by domestic demand, continued in 2007. Growth is expected to slow somewhat in 2008 and 2009 owing to a weaker world economy and tighter credit market conditions. Accordingly, the unemployment rate is likely to remain at its current high level. A sizeable negative output gap is expected to contain underlying inflation pressures despite higher food and energy prices.
Slovak Republic The high pace of growth in the Slovak Republic is mainly shaped by waves of foreign direct investments coming on stream. Activity will gradually decelerate from growth of over 10% in 2007 towards 6% in 2009, close to the economy’s estimated potential growth rate. Inflationary pressures will remain muted because of still very large labour reserves and rising labour force participation, as well as net immigration.
Spain Real GDP growth slowed significantly in the first quarter of 2008 and is expected to remain sluggish over the next 18 months, as the effects of the deteriorating housing market feed into domestic demand. After edging up in 2008, inflation should decline as a negative output gap opens up.
Sweden After slowing in 2007, due mainly to weaker export growth, the Swedish economy is projected to decelerate further in 2008 reflecting softening domestic demand. Employment growth should moderate and the unemployment rate may rise slightly. Slower GDP growth is projected to take output down to a level just below potential, easing inflationary pressures.
Switzerland Economic growth is expected to slow to 2% in 2008 and 1½ per cent in 2009, largely on account of the effects of the financial turmoil. Job creation is likely to ease and unemployment to rise somewhat. Inflation is projected to fall as oil price effects subside. The budget surplus could shrink and may reach balance in 2009.
Turkey The deceleration of growth through 2007 appears to be extending into 2008 as unfavourable international conditions and domestic political uncertainty continue to weaken confidence. Growth is projected to decline to below 4% in 2008, before rising to about 4½ per cent in 2009.
Brazil GDP grew by 5.4% in 2007, the fastest pace of expansion since 2004, but is expected to decelerate over the projection period. Private consumption continued to be the main driver, aided by improving labour-market conditions and still robust credit creation. Investment rebounded strongly, helping to alleviate emerging capacity constraints. Exports are performing well, despite a strong real. The trade surplus is shrinking fast due essentially to rising imports, especially of capital goods and intermediate inputs. Energy and food price hikes have pushed inflation up well above the 4.5% central target.
China Economic growth has eased slightly, to 10.6% year-on-year in the first quarter of 2008. It is expected to slacken further over the remainder of 2008 and in 2009, as the contribution from net exports declines, and the current account surplus is set to fall to 9½ per cent of GDP by 2009. Domestic demand growth is projected to remain robust over the forecast horizon, with buoyant incomes driving up consumption. Inflation has increased sharply, driven by soaring food prices, but is expected to ease somewhat going forward provided food prices stabilise, offsetting rising non-agricultural prices.
India Growth slackened over the course of 2007, to 8.5% by the fourth quarter of the year, partly as a result of tighter monetary policy. It would have eased more but for strong farm output. Even so, consumer and wholesale price inflation picked up, reaching nearly 8% by the spring of 2008. With a more restrictive monetary policy stance and a more normal harvest, output growth is projected to gradually slow to below 8% in 2008 and then to recover slightly in 2009. Higher oil and commodity prices are likely to push the current account deficit to 2% of GDP this year. With world food prices stabilising, the rise in the consumer price index is expected to ease back to 5.5% in 2009.
Russian Federation Real activity rose in 2007, but should moderate over the projection period as oil and metals prices stabilise around their current high levels. Domestic demand will continue to advance strongly, but net exports will exert a growing drag as imports surge while energy export volume growth is held back by supply constraints. Inflation is rising, propelled by steep rises in food prices, and validated by the central bank’s unsterilised intervention to manage the exchange rate, which has yielded very rapid money supply growth.
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