All in this together? - FT.com

Summary:
Overview of the economic situation and outlook for the UK, Eurozone, US and Japan. The global slowdown is the result a of a number of simultaneous shocks (the commodities shock, the housing shock and the credit shock) that have hit countries in different ways. In the US the focus is on the credit crunch, and the economy has proved resilient in the face of the commodities and housing shocks, whereas the UK and the Eurozone appear more affected by the commodities shock. The UK appears particularly vulnerable, with utility price rises feeding through fast. The ECB is mainly concerned about sticky prices and inflation. The US may be experiencing a Road Runner moment, and plummet as of yet. Doubts as to whether the credit crunch or the commodities shocks dominates the slowdown. Different outcomes depending on the true cause. (Published: 07/08/08)

Notes:

• UK: Utility price rises feed through fast
• UK has replaced the US as the economy seen to be at greatest risk of a severe downturn
• economic outlook has deteriorated more rapidly over the past quarter than that of any other advanced economy
• OECD now expects the UK economy to shrink for the rest of this year
• unlike any other Group of Seven economy
• Darling: economic circumstances facing Britain may be the worst in 60 years
• Bank of England:
  
• "sluggish real income growth and constraints on the ability of households to borrow dampen consumer spending, while the weak outlook for demand and the housing market [will] lead to falls in business and residential investment"
• so far, the dominant effect has been the squeeze on household and corporate incomes from higher global commodity prices
• has been exacerbated by a sharp depreciation in sterling
• which raised import prices
  
• and a liberalised market in gas and electricity
• has fed higher utility prices through the economy faster than in continental Europe
• fear is that, looking forward, tight credit conditions combined with Britain's high levels of debt and rapidly falling house prices are likely to prove more troubling than in many other countries

• Eurozone: Concerns surround 'sticky' inflation
• eurozone slowdown
  
• mainly the result of higher commodity prices
• have hit consumer spending
• should gradually revive if commodities now remain stable or decline
• as well as slowing global demand for exports from the 15-member bloc
• i.e. appreciation of the euro against the dollar
• until very recently has sharply aggravated the effect of slowing US growth on eurozone trade
• ECB sees price-setting mechanisms as working differently in the eurozone and the US
• requiring it to operate a more hawkish policy
• prices in the eurozone are "stickier":
  
• once inflation has become elevated, it stays there for longer
• financial turmoil a risk to growth
• but ECB insists that there is little evidence of a eurozone credit crunch
• surveys suggest banks have tightened credit standards significantly
• but lending to the private sector has continued to grow strongly
• housing markets in Spain and Ireland have weakened sharply but corrections there are not seen as a big problem at eurozone level

• US: Credit pain may yet reach its worst
  
• markets surprised by the strength of US growth in Q2
• but: this growth came almost entirely from net trade
• fear is that with the rest of the world weakening, the US will receive much less support from trade in the months ahead
• US economy has so far proved resilient to its house price crash, the credit squeeze and higher oil prices
• question is whether the economy is not very vulnerable to financial disruptions - or whether time lags are just longer than originally thought
• Fed thinks it is mostly a question of lags
• e.g. unemployment jumped unexpectedly to a five-year high of 6.1 per cent in August
• many experts fear that the peak impact of the credit crisis on real activity is yet to come
• most expect a very weak second half
  
• with the possibility of a quarter or two of negative growth around the turn of the year, as the effect of tax rebates wears off
• Fed cannot rule out a deeper and more protracted downturn
• officials increasingly downbeat on the outlook for growth outside the US
  
• one reason why the Fed now appears more comfortable keeping interest rates at 2 per cent for an extended period

• Japan: The contribution from exports goes
• economy contracted by a sharper than expected 0.2 per cent in Q2
• does not have the luxury of a high-growth cushion to help it absorb shocks
• net exports contributed nothing to growth
• for years Japan's main economic driver along with export-related capital spending
• until few months ago, falling exports to the US had been largely compensated for by rising shipments to Europe, the Middle East, Russia and other emerging economies
• but while exports to some developing countries are still robust, they are no longer enough to plug the gap left by falling demand from the US and, now, Europe
• no improvement in domestic consumption
• unlikely in light of weak wages and a softening jobs market
• Japan will have to wait for a recovery in global demand before growth picks up again

• cause of the global slowdown
  
• recent sell-off in global commodity markets
  
• signals growing concern that economic weakness could continue to spread in the months ahead
• many investors have gone from believing in a "decoupling" story to seeing a globally synchronised downturn
• prompting a bounce in the dollar
• seen as a safe-haven in a global downturn
  
• but: may be that just as the "decoupling" hypothesis was naive, the notion of a globally synchronised downturn may also be simplistic
• world's economies are battling a set of roughly simultaneous shocks that differ in their scope and reach
• commodities shock
• hit all economies more or less equally through sharp rises in food and energy prices that preceded the latest partial retreat
• credit shock
  
• global in reach but uneven in its impact
• effects greatest in the US and UK and least marked in Japan and the emerging world (the eurozone lying somewhere in between)
• housing shock
• residential prices crashing in a number of economies including the US, UK, Spain and Ireland
• all have been accompanied by economic spillovers from events in each economy
• effect is like seeing several large rocks thrown into a pond at once, each sending ripples that run across each other
• different interpretations of global events in different parts of the world
• US: tendency is to emphasise the credit squeeze
• not just domestically, but globally too
• other industrialised nations: experts attribute the Q2 global slowdown to what was then a surge in oil prices
  
• aggravated by the swing in trade
• (un)importance of the financial crisis
• some think US experience suggests that the global economy may just not be very vulnerable to financial disruptions
• could be that the credit shock was less important and the commodity price shock more important to the world economy than we thought
  
• or a Road Runner moment?
  
• possible US economy, having scuttled off the edge of a cliff and kept going for a brief while, looks down and plummets
• Fed thinks financial stress will have a big impact on growth in the months ahead
• credit squeeze appears to be most potent when it is combined with falling house prices and strained household balance sheets
• as in the US and the UK
• but: falling house prices may turn out to be a broader problem
• early 2000s saw a house price boom in dozens of countries
• OECD: real house price gains are now "decelerating nearly everywhere"
• commodities and consumer and business confidence
  
• has fallen sharply in non-US industrialised economies
• bodes ill for consumption and investment
• suggests that confidence may be an important channel in its own right
• transmitting weakness that originated in the US
• possible that the main cause of poor confidence was the surge in commodity prices
• if so, confidence should recover as commodity prices subside
• if the slowdown outside America was primarily a story of commodity prices - and not a global credit squeeze
  
• then after a weak period mid-year the world economy should pick up again
• US would by year-end again underperform relative to its peers but would continue to see support from exports
• even if the commodities story is right, there are risks ahead
• the oil market in particular remains tight and could rebound if the global growth scare abates
• credit squeeze
• if the credit squeeze is the key, weakness could spread as global banks cut lending
• non-US industrialised economies may anyway still be incapable of sustaining autonomous growth
• much depends on the performance of the big emerging economies
• above all China
• some experts still doubt the ability of the big emerging economies to substitute domestic demand for exports.
• China and its peers may either slow more sharply than anticipated or reaccelerate too quickly, igniting inflation at home and in commodity prices, before they are forced to slam on the brakes again, with potentially global consequences