Global Economic Outlook - March 2008

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Prudential Investment & Securities Co. Ltd.

2008-03-13 17:46

Seoul--(뉴스와이어)--Growth: U.S. Close to Recession After weak Q4. Eurozone, U.K. Slowing. Japan Slows after Q4 Upside Surprise

· Global growth expected to slow further in H1 2008 with the U.S. perilously close to a recession, while growth momentum in Europe and Japan is decelerating. Meanwhile, China, India and other emerging economies are expected to slow modestly in 2008 from the robust pace in 2007.

· Growth was mixed across major economies in the fourth quarter (Q4) with the U.S. slowing sharply to near stagnation, Eurozone slowed to around trend pace, while U.K. and Japan surprised on the upside. China continued at double-digit pace.

· The U.S. economy slowed sharply in Q4 with GDP growth at 0.6 percent quarteron-quarter (QoQ) annualized rate. The housing drag intensified with residential investment knocking -1.3 percent off Q4 GDP. Inventory liquidation subtracted -1.5 percent.

· Eurozone GDP slowed in Q4 to 0.4 percent QoQ, 2.2 percent YoY pace from 0.8 percent QoQ, 2.7 percent YoY pace in Q3 due to weak consumption and investment spending. U.K. GDP surprised to the upside in Q4, up 2.9 percent YoY due to resilient service sector activity. Japan’s GDP surprised to the upside in Q4, rising 3.7 percent QoQ annualized after a downwardly revised 1.3 percent pace in Q3.

Inflation: Higher Headline in Early 2008 Due to Elevated Energy and Food Prices. U.S. Core Creeps Higher

· Headline inflation remained elevated in early 2008 under pressure from high energy and food prices. U.S. headline inflation at 4.3 percent YoY in January, pressured by energy and food prices. Eurozone inflation at record high of 3.2 percent in February. U.K. headline crept up to 2.2 percent in January, while Japanese headline at one-year high of 0.7 percent. China’s headline jumped to 7.1 percent YoY.

· U.S. core inflation edged up to 2.5 percent YoY in January while core PCE held at 2.2 percent. Eurozone core inflation cools to 1.7 percent, while U.K. core down to 1.3 percent. Japanese core inflation at nine-year high of 0.8 percent in January.

Interest Rates: Fed’s 125 bps Rate Cuts. Further Fed & BoE Rate Cuts. ECB & BoJ Also Likely to Cut

· The Fed responded to the worsening U.S. economic outlook and the sharp equity sell-off in January by cutting rates by 125 bps in January. The Fed lowered its real GDP growth forecast and acknowledged that growth risks are tilted to the downside. Chairman Bernanke assured that the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." Markets now expect the Fed to cut rates by 50 bps in March and another 50 bps in Q2.

· The ECB held rates steady at 4 percent in March. In February, the bank softened its tone, acknowledging increased downside risks to growth. In March, the ECB raised its inflation forecast and is unlikely to cut rates in early Q2 with inflation at a record high. However, sharply slowing growth and credit market turbulence is likely to prompt ECB rate cuts in late Q2, early Q3. The BoE remained on hold in March after cutting rates by 25 bps in February as expected. The BoE statement expressed caution about the pace of further easing due to upside inflation risks, but deteriorating growth momentum is likely to lead to more rate cuts in Q2.

· The BoJ held rates at 0.5 percent in February as financial markets remained volatile on concerns about a U.S. recession and deteriorating Japanese growth outlook. The bank is expected to remain on hold in March ahead of the appointment of the new BoJ Governor. However, the BoJ indicated it would act quickly to restore growth, increasing the likelihood of a rate cut.

Currencies: Dollar Falls. Euro Surges Above $1.50 on Fed Rate Cuts & U.S. Recession Risks. Yen Rises

· The dollar fell against the euro and yen in early 2008 following aggressive Fed rate cuts in January and growing U.S. recession risks, rising above the $1.50/Euro level. The yen rallied on unwinding of carry trades.

· The dollar is likely to remain weak in the near-term due to heightened recession fears and expectations of further Fed rate cuts. However, in the medium-term, the dollar is likely to stabilize against the euro as the Eurozone’s growth advantage narrows.

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