Since economic concerns are at the forefront for so many of us, here is the “global economy” portion of Ed Henderson’s June 2008 Electronic Market Forecast. See www.hendersonventures.com for details on how to get Ed’s entire 26-page newsletter.

Global GDP growth fell during the first quarter

During the second half of last year, U.S. Gross Domestic Product (GDP) plunged from a 4.9% annualized growth rate during the third quarter to an anemic 0.6% pace during the final quarter. Yet, global economic activity maintained a 3.9% rate of expansion, as illustrated below. The apparent anomaly can be traced to the supercharged growth rates of the developing nations, and particularly those that export energy, minerals or food. But the U.S. slowdown is starting to have a significant impact on global GDP as witnessed by the first-quarter results. That is, U.S. GDP actually accelerated slightly to a 0.9% rate of growth, but world economic activity slipped from 3.9% during the fourth quarter to 3.4% during the first quarter of 2008, as shown below.

Figure 1: Global GDP Growth (converted at constant dollar exchange rates)

Chinese growth begins to slip

While it’s difficult to characterize a 10.6% growth rate as a “slip,” Chinese GDP has decelerated continuously during the last three quarters. During the opening quarter of 2008, economic activity grew by 10.6%, compared to an 11.9% gain during the second quarter of last year, as captured in the table Figure 1. The slowdown has been the result of higher energy costs, tighter monetary policy and a significant appreciation of the yen, which has adversely impacted exports. Second-quarter 2008 results will take a hit from the devastating earthquakes during May. And because policy makers are expected to deal more forcefully with inflation after the Olympics monetary policy will become even tighter while the yuan appreciates further. In short, Chinese GDP is predicted to decelerate continuously during the next two years sliding from an 11.9% pace in 2007 to an 8.3% rate of growth in 2010, as shown in the bottom-right chart of Figure 1.

Europe bolstered by exports, for now

During the first quarter there was a wide range of results for the countries of West Europe. Spain, which had been enjoying superlative economic growth during the last decade, posted only a 1.2% GDP gain during the first three months of 2008. Moreover, Spanish economic gains can be expected to be subdued well into 2009 as the fallout from the punctured real estate bubble takes its toll, as it will in England and Ireland. At the other end of the spectrum, Germany posted a surprising 6.1% burst as policy changes and exports drove economic gains. Overall, West European GDP actually accelerated from a 2.0% rate of growth in the fourth quarter of 2007 to 2.7% during the opening three months of 2008. But going forward, higher energy costs, tighter lending standards, slower economic growth among trading partners and continuing fallout from the housing industry will tamp down potential growth rates. GDP is predicted to slip from a 2.9% rate of growth in 2007 to only 1.6% this year, followed by slightly better gains by 2010, as shown in the Figure 1 table.

Japanese export position to become less comfortable

Japan has also benefited from the hyper-charged economies of the developing world. Exports to China have been particularly strong, as Japan supplies the technologically-advanced capital equipment to the burgeoning Chinese manufacturing sector. But Japan, too, will suffer the ill effects of higher energy costs and slowing economic growth in the developing world. After a 2.1% gain in 2007, growth rates will slip into the 1.3-1.8% range during the next few years, as shown in the Figure 1 table.

Overall, global GDP will also decelerate in 2008, falling from a 3.8% rate of growth in 2007 to 2.9% this year. However, as the U.S. economy picks up momentum during 2009 and 2010, so too will world GDP, which will accelerate to a 3.7% rate of growth in 2010, as illustrated in the Figure 1 table.

CONCERN SHIFTS FROM CREDIT CRUNCH TO INFLATION

Inflation worries move to the fore

When the ongoing credit crisis emerged last August, the risk of a meltdown of global financial markets focused the minds of the world’s central bankers. Worries about inflation took a back seat as the U.S. Federal Reserve Board (Fed) aggressively lowered interest rates. And while the European Central Bank (ECB) did not lower rates, massive amounts of liquidity were injected into the Eurozone banking system in order to prevent a credit seizure.

But now, as concern about a financial collapse eases, anxieties over accelerated inflation have become heightened as oil, industrial commodities and food prices continue to soar. For example, the inflation rate in Europe accelerated to 3.0% in April, which was well above the ECB target of 2%. In China, consumer prices hit a 12-year high of 8.5% in April. That compares to a 3.0% rate a year earlier.

Accelerated price increases are most prominent in the emerging economies where soaring food prices have precipitated protests and riots. Some governments have responded with subsidies, wage and price controls, and export taxes on food. Those measures provide a faint echo of failed 1970s policies and, therefore, an economic storm warning.

Overall, global inflation is running at about a 5.% rate, which is the highest figure in about a decade. It is expected that the ongoing deceleration of global economic activity will moderate commodity price increases and, therefore, the overall rate of inflation. But if commodity prices do not begin to level off or decline, central bankers will be forced to implement aggressive interest-rate increases.

And while that dramatic action is not currently anticipated, the next interest-rate moves by the Fed and the ECB are most likely to be up rather than down. Consequently, the global economic recovery may be fighting some monetary-policy headwinds during the next 18 months or so.