THE ECONOMIC REBOUND WILL BE DELAYED ( Chart 1 )

Credit to remain tight well into 2009

The international housing bust has created gigantic losses for financial firms. To ensure that they meet minimum capital requirements, banks are cutting back on loans; a process known as deleveraging. Companies and individuals that might have easily received loan approvals in 2007 are now finding it much more difficult to secure financing. And given that stock markets are falling along with housing prices, consumers have begun to retrench in the face of higher food and energy prices. And because credit markets are expected to be tight until well into next year the global economy is forecast to remain sluggish through 2009. However, more attractive growth rates are predicted to reappear in 2010, as shown ( Chart 1 ).

	Chart 1

Interest rates have been rising

Although the Federal Reserve Board (Fed) left interest rates unchanged at its August 5th meeting, inflation worries have prompted tighter monetary policies in many countries. Of significant note was the decision by the European Central Bank (ECB) to raise interest rates to 4.25% from 4% in early July. Subsequent to the decision to raise interest rates, a bevy of dismal economic statistics suggests that the Eurozone has slipped into a recession. Tighter financial markets, along with a strong euro, will lead to decelerating growth through 2009. After a 2.9% increase in 2007, West European economic gains will slide to 1.6% this year and 1.2% in 2009, as shown in the top-right chart of ( Chart 1 ).

China tilts back to stronger economic growth

During the last 18 months, Chinese monetary authorities had progressively tightened financial markets in the face of accelerating inflation. And although prices continue to far exceed the 2008 target of 4.8 percent, the People’s Bank of China announced that rapid economic growth will displace inflation-fighting as priority one. Consequently, we have slightly raised our Gross Domestic Product (GDP) forecast for China. Still, growth rates are predicted to decelerate through 2010, as shown in ( Chart 1 ).

Good news and bad news from the deflating commodity bubble

The ongoing global economic slowdown has reduced demand for a wide range of industrial and consumer commodities. Consequently, prices for metals and energy products have tanked with the help of a selloff from hedge funds. Most notably, oil prices have fallen from a July 11th high of $147/barrel to $119/barrel on August 5th.

Should prices remain restrained, as expected, overall inflation rates will ease in the months ahead. Lower rates of inflation, in turn, will head off more-aggressive interest-rate hikes by central bankers. And while interest-rate forbearance will pave the way for a soft global economic landing, a significant portion of the emerging economies will feel substantial economic pain. That is, countries that depend on commodity exports, such as the OPEC nations, Brazil, Russia and even Australia, will suffer faltering economic growth rates.

EQUIPMENT STILL STRONG, FOR NOW ( See Chart 2 )

	Chart 2

Consumer dependence will be a problem.

Despite slower economic growth, global equipment markets grew quite respectably during the first half of 2008. But as shown in the left chart below, global output has been in decline since peaking at an annualized rate of $1.72 trillion during the fourth quarter of 2007. The June 2008 pace was $1.58 trillion. Growth-rate wise, the 3-month moving average (3/12) growth rate has also fallen from a fourth-quarter 2007 peak of 13.3%, as shown in the right chart. The June figure was 6.1%.

The statistics just quoted are calculated using constant exchange rates. They, therefore, suggest much weaker growth than the elevated revenue gains posted by a composite of 61 major electronic equipment manufacturers. Their equivalent 3/12 growth rate for the second quarter was 10.4%, but with the help of appreciated foreign currencies. Still, the second-quarter growth rate was significantly below the 12.0% gain posted during the first quarter, and the 13.5% runup during the fourth quarter of 2007. In short, global equipment production is decelerating rapidly.