1.2 World economic performance in Q4/ 2007
Global economy slowed down in the fourth quarter in the face of ongoing sub prime crisis in the US which triggered the US economic growth to moderate. In addition, the financial market strains have dampened the EU economy as well. Chinese economy has also softened as a result of weakening exports led by world economic slowdown, Yuan appreciation, and reduction in tax rebate. Moreover investment slowdown following tightening monetary policies also contributed to the economic slowdown. Nevertheless, Japanese economy and Asian economies remained robust thanks to growing intra-regional trade. In the second half of 2007, the world economic growth slowed down significantly as the US sub-prime-related problems have protracted and led to widespread financial turbulence and dampened real sector. Concurrently, continued surge in oil prices has put upward pressure on prices and thus causing a fear of stagflation.
- US economy expanded by 2.5 percent, decelerating from 2.8 percent in Q3 (or 0.6 percent, qoq, annualized rate, lower than 4.9 percent in the previous quarter on its advanced estimates). Key engine of growth in this quarter included exports, household consumption and nonresidential investment. Investment in residential, however, continued to fall due to persistent sub-prime problems which led to a credit crunch and tightened credit conditions. This has led to overall investment contraction. Signs of weakness
in housing market have emerged through major indicators. For example, new housing starts persistently declined since Q2 of 2006. This decline was needed to ease high inventory level. Existing home sales still dropped markedly by 24.7 percent in fourth quarter, as compared with 8.5 percent contraction in Q3. High inventories and the drop in existing home sales has led to continual declines in home prices and
also has dampened loan collateral values. Housing credit continued its slow trend since the end of 2005, expanding by 3.2 percent in Q4. Additionally, weaker investment inevitably affect production sector. Production Managers’ Index (PMI) steadily declined to 48.4 in December 2007. On stability front, pressures on inflation have been upward. In Q4, headline inflation speeded up to 4.0 percent following rising
commodity prices and oil prices as well as weakened US dollar. Meanwhile, core inflation averaged 2.3 percent, comparable to that of 2.2 percent in the previous quarter. This was partly due to a moderate domestic demand.
- Euro Zone economy grew by 2.3 percent in Q4, slowing down from 2.7 percent in the previous quarter (or 0.4 percent, qoq, sa, down from 0.8 percent in Q3). This owed to moderated growth of the major economies —primarily Germany, France, Italy and the Netherlands. The main reason behind growth slowdown came from weaker exports following slower world growth and a stronger euro. Moreover, banks’ balance sheet position has deteriorated as a hit from the sub-prime crisis persisted and banks tightened
their lending standards which subsequently suppressed investment. Price pressures continually increased since
September 2007. In Q4, inflation averaged 2.9 percent, up from 1.9 percent in Q3. Core inflation, however, remained unchanged at 1.9 percent.
- Japanese economy grew by 2.0 percent, accelerating slightly from 1.7 percent in the previous quarter. Exports of goods and service remained the key drivers of growth owing to strong exports to Asian market, while exports to the US remained soft following the US slowdown. Domestic demand softened evidently. Private consumption slowed down in line with declining consumer confidence and price surges. Investment in residential construction notably dropped stemming from the impact of the revisions of the Building Standards Law which delayed the construction approval process. Inflation was 0.5 percent, reflecting that risks from
deflationary pressure started to ease. This has led the Bank of Japan to leave the interest rates unchanged.
- Chinese economy remains strong but has begun to slow down. In Q4, the economy grew by 11.2 percent, somewhat slower from 11.5 percent in Q3 owing to weaker investment and industrial production. Industrial production expanded by 17.3 percent in November-December 2007, from a peak of 19.4 percent in June. The slowdown in demand was due to the softening contribution of external trade to GDP growth
since import growth has started to outpace exports. Nevertheless, the rebound in domestic demand had
cushioned and supported growth in this quarter, in particular a stronger household consumption. Retail sales increased by 19.0 percent, accelerating from 16.8 percent in Q3. Fixed investment increased by 24.0 percent, slightly lower from 25.8 percent in Q3. This is due partly to continues tightening policies introduced in this quarter including both stricter enforcement of bank lending as well as of criteria for investment projects. On stability front, inflation rose markedly due to higher food prices. In Q4, headline inflation was 6.6 percent4, driving up from 2.7, 3.6 and 6.1 percent in the first three quarters.
- Asian economy continues to expand at a solid pace, underpinned primarily by improving domestic
demand, especially strong investment, in tandem with accommodative monetary and fiscal policies. This helped compensate the export slowdown in line with lower US growth. However, exports were cushioned by a flourished intra-Asian trade, particularly China and India and uptrend of world commodity prices. Meanwhile, imports also picked up significantly following stronger domestic demand. Inflationary pressures have risen due to rising oil and food prices, but not sharply as expected in response with currency appreciation.
In all, the world economy in 2007 slow down from 2006, owing to the US economic downturn in
response to ongoing sub-prime crisis which depressed real estate and financial sector. This problem also spreaded to financial market worldwide, especially the European market and subsequently dampened the growth. Meanwhile, Japanese economy and Asian economy have thus far continued to expand satisfactorily, benefited from high export growth within the region, supported by China which has become important export market
for Asia. On stability aspect, inflation has risen due to rising oil prices. However, subdue core inflation
within monetary target and softened domestic demand has led monetary authorities in most Asian countries to cut rates persistently. This expansionary policy is expected to help stimulate domestic demand and alleviate credit crunch problem as well as reduce risk of non-performing loans.
World Economic Growth (%YOY)
2006 2007 2007 2008f 2008f
Q3 Q4 Year Q1 Q2. Q3. Q4 Year Dec.‘07. Feb ‘08..
World 4.6 4.8 4.9 4.8 5.0 5.3 4.7 4.9 4.5 4.1
USA 2.4 2.6 2.9 1.5 1.9 2.8 2.5 2.2 1.9 1.2
Euro 2.8 3.3 2.9 3.2 2.5 2.7 2.3 2.7 2.4 2.0
Japan 1.4 2.2 2.2 2.8 1.6 1.9 1.8 2.0 2.0 1.6
Hong Kong 6.8 7.3 6.9 5.6 6.6 6.2 5.8f 6.0f 5.4 5.4
Singapore 7.4 7.0 8.2 7.0 9.1 9.5 5.4 7.7 6.0 6.0
South Korea 4.9 4.0 5.0 4.0 5.0 5.2 5.5 4.9 5.0 4.5
Taiwan 5.1 4.0 4.7 4.2 5.2 6.9 6.4 5.3 4.0 4.0
Indonesia 5.9 6.1 5.5 6.1 6.4 6.5 6.3 6.2 6.4 6.0
Philippine 5.1 5.5 5.4 7.1 7.5 6.6 7.4 7.3 6.0 6.0
Malaysia 6.0 5.7 5.9 5.5 5.8 6.7 5.2f 5.8f 5.8 5.5
China 10.6 10.4 11.1 11.1 11.9 11.5 11.2 11.4 10.6 10.0
Vitenam 8.8 8.9 8.2 7.7 8.0 8.7 8.8f 8.3f 8.5 8.0
2. Economic Projection for 2008
2.1 The world economic outlook for 2008
(1) The extent of the world economic slowdown in 2008 will depend crucially on (i) the depth and the protraction of sub-prime crisis that has noticeably dampened the U.S economy since the latter half of 2007, (ii) the correction of the U.S economy in response to financial turbulence and (iii) spillover effects to other major economies, in particular Euro zone, Japan, China and other Asian countries. By January of this year, the world economic indicators signaled a worse slowdown in 2008 than previously expected. The negative impacts from housing and credit markets crunch are likely to turn the U.S. economy into a recession in the first half of 2008 which, in turn, would have a wider implication to the world economy. Accordingly, the economic outlook for the U.S, advanced economies in Euro zone, Japan, South Korea and other major developing countries are revised downward. All in all, the world economy is expected to slow down from 4.9
percent in 2007 to a moderate rate of 4.1 percent in 2008, lower beyond 4.5 percent baseline assumption for the previous projection of the Thai economy.
(2) The U.S economy showed a clear sign of slowdown: Economic indicators in January highlighted that the U.S is heading to economic recession in the first half of 2008. Consumer confidence fell. Household wealth has been shrinking due to tightening credit standard, impaired home and equity prices, higher energy and food costs, and deteriorating employment prospect. In January, non-farm payrolls contracted for the first time since 2003 while the overall unemployment rate is expected to increase from the current level of 4.7 percent to 5.1 percent at the end of 2008. Investor confidence has been shaken by the massive write downs of sub-prime related debts held by financial institutions. Against these foreseen risks, the Federal
Reserve cut its Fed fund rate by 75 basis points on January 22 and another 50 basis points on January 30 while the Congress has approved the fiscal stimulus package worth of approximately 150 billion USD or around 1% of GDP.
The decline in short term interest rate and mortgage rate in line with the decisive Fed Fund
rate reductions together with direct liquidity injections have eased the tight credit market condition. In addition, the Fiscal stimulus package is expected to revive consumption in the latter haft of 2008. Nevertheless, the ISM composite index of non-manufacturing activity in January recorded the new low since 2001 and indicated that the U.S economy is probably in a mild recession. However, the economy is expected to rebound in the latter half of the year. Therefore, the US economy is expected to grow moderately by 1.5
percent in 2008, down from 2.2 percent in 2007.
(3) Downside risks in other advanced economies are heightened due to the U.S economic
downturn and tight credit market conditions. As of January, Euro zone economic indicators are mixed. The service sector PMI index decreased slightly while inflation rate recorded a 14 year high. Nevertheless, the risk of economic slowdown is mounting as a slowing U.S demand could dampen its export, which has already been dragged by the appreciation of Euro. Consumption is at risk from asset price reversal. Investment tends to slow down in response to the downward trend of exports and domestic consumption as well as tightening
lending standards. Against these developments, the European central bank (ECB) maintained its policy rate at 4.0 percent in recent meeting in February, due to the concern over the economic slowdown despite the inflation pressure that accelerated in January. Overall, Euro zone economy is expected to slow down from 2.8
percent in 2007 to 2.0 percent in 2008, The Japanese economy is expected to soften from 2.0 percent in 2007 to 1.6 percent in 2008, since adverse impacts of the US slowdown on exports and manufacturing production are likely to be greater than what previously expected.
Growths in major emerging economies are also revised downward, given the slowdown in major industrialized countries. The Chinese economy is expected to expand by 10 percent in 2008, slightly down from 11.4 percent in 2007 due to the decline in import demand from advanced economies and its monetary policy
tightening to cool down overheated economy. Therefore, the investment expansion is expected to moderate in response to interest rate hike and increasing risk of excess production capacity. Business profits are eroded by price competition, interest rate increase and the upward pressure on production costs. The latter is stemmed from the surge in energy and land prices as well as the enforcement of environmental standards and labor protection measures. Asian NIEs are expected to grow at a slightly lower rate than in 2007, due
to the lower growth in China and advanced economies which are their important export markets. However, the expansionary monetary policy would support domestic demand to maintain its growth momentum.
(4) World market interest rates are on downward trend. The decisive U.S interest rate reduction and
the slowdown of economic activities put downward pressure on the world market interest rates. Following the US interest rate reduction of 125 basis points in January, the Bank of Canada and the Bank of England cut their policy rate by 0.25 percent while European Central Bank maintained its policy rate at 4.0 percent. As the recession risk persists, the Federal Reserve is likely to opt for further policy rate reduction, with a terminal rate of around 2.0 - 2.25 percent by the year end. Similarly, ECB is expected to cut its policy rate in the second quarter, as inflationary pressure subsided and the downside risk on economic growth intensified. Regarding to policy interest rates in other major economics, Bank of Japan tends to maintain its policy rate throughout 2008, while China tends to raise its policy rate to contain its overheated economy. Given such interest rate trends, the US dollar will continue its depreciation against Japanese Yen, Chinese Renminbi, and other Asian currencies. However, Euro-US dollar exchange rate would be relatively stable.
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