macro economic update
by Glenn Meekin, Finance Contractor
Global growth is expected to slow to just 2.7% in 2009 after growth of 3.3% in 2008, well down from the 4.4% rate in 2007. Domestic activity in the US is still weak, with the housing sector still contracting. The financial crisis in the US, in particular, the collapse of Lehman Brothers and the debt levels of AIG, is impacting around the world.

In the June 2008 quarter, US GDP rose 0.8% whereas growth in the UK was flat and Japan and the Eurozone both contracted in the quarter.

The woes of the financial sector are likely to squeeze the wider UK economy even more powerfully than had been expected. Pleasingly, the other threat to growth – that from inflation – appears to be subsiding. The biggest risk to the financial sector is also the biggest downside risk to the economy; namely that damage to bank balance sheets could lead to tighter credit conditions, lower asset prices, lower consumption and investment, and hence, more losses for banks – resulting in a downward cycle. House prices are falling in the UK and this is also likely also depress the economy.

China, while still growing at 10.1% YOY, is forecast to slow to 8.3% in 2009. Inflation has eased to 4.9% in August 2008, down from 8.7% in February, while export growth has slowed.

Singapore’s full year economic growth is expected to dip below its earlier forecast of between 4 and 5 percent due to the impact of the US financial crisis, according to a government official. The upheavals on Wall Street may lead to a tightening of credit conditions and slower economic growth. Singapore GDP contracted 6 percent on-quarter in the second quarter.

Hong Kong’s economy unexpectedly shrank in the second quarter, hit by the widening impact of a US downturn and high inflation that undermined domestic consumption. Gross Domestic Product contracted 1.4%, seasonally adjusted, from the previous quarter. The US slowdown and faltering European demand is filtering through Asia. However, unlike Japan, Hong Kong is not expected to head into recession.

Sources: NAB Capital “Australia at a Glance” 15 September 2008
The Hong Kong Express 15 August 2008 – “Hong Kong Economy Weakest in 5 Years”
Financial Times 22 September 2008. “Gieve Warns of Threat from Financial Crisis”. Author Norman Cohen