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Hitachi Research Institute

Economic Outlook

Latest economic forecasts for Japan, the U.S., Europe, and China, etc

Mar. 2008 Short-term Economic Outlook Summary

World economy to enter downturn

The three factors identified as having a destabilizing impact on the world economy in the previous forecast (December 17, 2007)—(1) the U.S. subprime loan crisis, (2) high crude oil prices, and (3) the overheating of the Chinese economy—all developed along the lines posited in the risk scenario.
U.S. housing prices continued to fall, the knock-on effects of losses on financial institutions persisted, and the FRB lowered the federal funds rate to 3%. Driven up partly by an influx of speculative money, the price of crude oil broke the US$100/barrel mark, while in China, share prices swung back down as consumer prices rose further.
In this forecast, forecast economic growth for the world economy as a whole in 2008 was revised down to 2.6% (from 3.1% in the previous forecast) on the grounds that both Japan and the U.S. are projected to enter downturns.

World economic outlook remains in the balance

In the U.S., monthly economic indicators fell sharply across the board, making an economic downturn from the first quarter of 2008 unavoidable. Although growth is expected to temporarily pick up in the second half of 2008 owing to monetary easing and the effects of tax cuts, adjustment in the housing market and financial institutions’ balance sheet recovery will take time, and the pace of recovery until 2009 will be sluggish. Unless slowing demand due to the economic downturn curbs the rise in inflation caused by escalating crude oil prices, however, there remains a risk of stagflation. The real GDP growth rate of the U.S. in 2008 is therefore revised down to 1.2% (from 1.8% in the previous forecast).
The EU economy has also begun to feel the effects of the downswing in the U.S. Export growth has begun to slow owing to the strength of the euro, and consumption has started to slide rapidly. Adjustment in response to the housing bubble is already underway in countries such as Spain and Ireland. Nevertheless, inflation rates remain higher than acceptable levels, and monetary easing will be postponed. The projected real GDP growth rate of the EU has therefore been revised down to 1.8% (from 2.3% in the previous forecast).
Even in emerging economies such as China, which decouplers had hoped would be largely unaffected by a downturn in the U.S., share prices are declining sharply. Already in China, investors looking beyond the Beijing Olympics are closing out. Looking ahead, a negative wealth effect will combine with policy factors such as rising inflation, monetary restraint, and the strong yuan to cause growth to slow. China’s real GDP growth rate is consequently projected to post single-digit growth of 8.0%, as forecast previously, down from the double-digit growth registered from 2003 through to 2007.
While this downturn of the world economy has been precipitated by the subprime loan problem in the U.S., the simultaneously tight world market for primary commodities caused by rapid growth in emerging economies has formed the backdrop. The sharp rise in primary commodity prices is consequently spreading from crude oil to mineral resources and cereals, and it is unclear to what extent the growth rate of the world as a whole needs to fall in order for balanced, sustainable growth to be achieved. If global money such as government funds can play an efficient market function, the world economy may begin to stabilize, but the situation does not allow for optimism.

Unable to count on foreign demand, the Japanese economy will enter a downturn

Despite the limited financial impact of the subprime loan problem, the impact on the Japanese economy of the global downturn and sharply rising primary commodity prices will be considerable. Exports will slow and corporate earnings will show little growth, while personal consumption will be hit by a sharp decline in consumer sentiment prompted by stagnating wages and the rising price of daily necessities. Housing investment, too, is forecast to recover only sluggishly due to inventory adjustment in reaction to sharply rising condominium prices, despite the revised Building Standards Law no longer having an impact. Japan’s real GDP growth rate in fiscal 2008 has consequently been revised down to 1.2% (from 1.5% in the previous forecast). The record period of expansion stretching back to the trough in January 2002 is forecast to come to a close. In fiscal 2008, exchange rates of \100 to the U.S dollar and \160 to the euro are forecast as a result of the closing interest rate gap between Japan and the U.S. due to the further lowering of interest rates by the FRB.

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