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The global economy will weather the U.S. mortgage storm. Asia's economic fundamentals are still very healthy. Economic reforms undertaken in the region since the currency crises a decade ago will help to shield Asian countries from the current turbulence. Meanwhile, Asian growth will keep commodity prices high, in turn bolstering Latin American economies. In Europe, the large exposure of some European banks to the U.S. subprime mortgage mess is causing some credit strains. But these will only bruise European domestic demand, not kill it off.
We see global gross domestic product expanding by 3.3% in 2008, just a tad less than this year. That, plus continued weakness of the dollar, will eat away at the U.S. trade deficit. It'll contract to roughly $709 billion next year, or 5.1% of GDP, down from $727 billion and 5.4% of GDP this year.
The thirteen-member euro zone (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia and Spain) will see its total GDP expand by 2.3% in 2008, compared to 2.6% this year. In France, the mild slowdown will complicate President Nicolas Sarkozy's efforts to push through the needed labor and pension reforms. The United Kingdom will likewise grow 2.3% next year, compared to 2.8% in 2007. Weaker European growth will hit Russia's energy exports, edging Russian GDP growth down to 6.2% in 2008 from 6.7% this year.
Japan's growth will slip to 2% next year from 2.3% this year. That's partly due to the yen's strengthening against the dollar, which will hurt exports to the U.S., and also due to an expected slowdown in demand from China. There, investment in urban infrastructure development and real estate spending is likely to drop in the second half of 2008, following the Beijing Summer Olympics. That said, China’s economic growth will only slow to a still-robust 10% next year from this year’s 11%. India will also slow a tad, growing 8.6% in 2008 compared to 2007's 8.8%. By contrast, South Korea is expected to emerge from a comparative slow patch, revving up to 5.1% growth next year from 4.5% this year.
With a likely uptick in U.S. growth in 2008, Mexican GDP will accelerate to 3.7% from this year's anticipated 2.9% -- an improvement, but still below the country's potential growth rate. By contrast, Canada's growth will hold even at 2.5%, with the increase in U.S. demand offset by the strong Canadian dollar’s toll on Canada's income from exports. Likewise, Brazil's GDP will register around 4.5% growth for the second year running, with the benefits of high commodity prices offset by the real's strength against the dollar.
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