February 15, 2008

Global Economy Strong but Slowing

Global output is expanding at healthy, but noticeably declining, rates (Chart 1). Evidence of slower credit and real activity growth is materializing throughout the industrialized world. Headline inflation rates have picked up significantly across the globe, due in large part to energy and food prices (Chart 2). Core inflation has risen by about 50 base points in most industrialized countries over the past two years.

In Western Europe, real GDP growth remains positive but is expected to weaken to below trend in 2008. Growth is robust in Germany, whereas the U.K. and Spain are seeing long periods of solid growth threatened by marked housing corrections.

Available data for the euro area and the U.K. point to a continued expansion of credit to households, albeit at slower rates. Credit to firms is still rising strongly. However, banking survey data from these regions suggest that credit standards are becoming considerably tighter, particularly in the mortgage market. 

The growth rates of residential investment and house prices are weakening in Western Europe. The U.K., Spain and Ireland appear to be experiencing the sharpest housing corrections in the area.

As for the United States’ other key trade partners, Japan’s moderate expansion continues. In Canada, growth has been near trend, but a slowdown is expected in coming quarters, a result of weakening external demand. A slight pickup in activity is anticipated for Mexico, as healthy domestic demand should offset declining demand in the United States. India and China are both expected to see growth slow by half to a full percentage point in 2008.

The U.S trade deficit increased markedly in November to $63.1 billion, due in large part to the recent spike in energy prices. December’s trade deficit narrowed to $58.8 billion (Chart 3) as exports increased by 1.5 percent while imports decreased by 1.1 percent. The contribution of net exports to GDP in the fourth quarter was much lower than it was in the third quarter, although it remains positive.

The U.S dollar had a bout of strength in December (Chart 4) against most major currencies, but it has recently given back those gains.

—Erwan Quintin and Janet Koech

About the Authors Quintin is a senior economist and policy advisor and Koech is a research analyst in the Research Department at the Federal Reserve Bank of Dallas.