Business News - Monday December 17, 2007
A different sort of bad news
The world slowed in 2007. Global growth was robustly above 5% in 2006, but cooled in 2007. The first three quarters of this year were about the slowdown of the US consumer. This was a housing-led slowdown, not a sub-prime crisis, nor a credit crisis.
For most of 2007, the weakness of US consumption was specific. Raising cash through mortgage refinancing averaged around 5% of disposable income every year over the last five years. As house prices began to plateau and then decline, mortgage refinancing slowed. Thus, the US consumer slowed. From 4.4% (annualised) consumption growth at the start of 2006, the descent of the US consumer was something of a headlong rush, and by the third quarter 2007 consumer growth was 2.7%.
Mortgage refinance is not normally required to purchase an iPhone (they are not that expensive). The money raised from refinancing went on ''big ticket'' items _ cars, home improvements and so on. This meant tough times for exporters of cars, but not for economies whose products were less expensive.
For 2008 the structure of the global slowdown has shifted. We are overlaying a credit crisis of confidence onto the mortgage refinance problem, and this credit crisis is not likely to be resolved rapidly. UBS estimates that $602 billion of writedowns will have to occur in the financial sector. Of that, $355 billion will be required from the listed banks _ roughly 2.2% of combined US and European GDP.
So far writedowns have totalled $70 billion.
For the United States, this broadens the slowdown. This is no longer about cars and home improvements alone. For the first time in years, credit standards on credit cards and consumer loans are tightening. An iPhone may not require mortgage refinancing, but it may be bought with a credit card. More sectors of the economy are subject to weakening demand, with implications for imports. The US ISM business sentiment index reported a drastic slowdown in import demand in October.
The credit crisis has also gone global (or at least trans-Atlantic). European growth is undermined by credit market problems. Many loans in Europe (from Spanish mortgages to German business loans) feature adjustable rates. These loans reference the money market's three-month Euribor. This interest rate has been forced higher by the credit crisis (as it contains an element of credit risk). Without the ECB raising European policy rates, there has been an effective monetary policy tightening across the European economy. Consumer and corporate spending is likely to suffer as a consequence.
A critical question is whether Asia can decouple from this? In one sense the answer is a resounding ''no''. US demand for a wide range of products is slowing. European demand for a wide range of products is slowing. Asian exports are likely to slow. However, Asian consumers and corporations are not generally as indebted as their European and American counterparts. Thus the credit crisis holds fewer direct terrors for the Asian region. This means that Asian domestic demand may be able to offset waning exports.
For the past two years the Thai economy as been undergoing its own slowdown, led by the domestic economy _ four-quarter growth in private consumption and investment reached a low point in the second quarter of 2007.
However, latest data shows an acceleration in both these areas in the third quarter, while business confidence has shown signs of a nascent recovery.
This comes against the political backdrop of the Dec 23 election. This could ultimately result in dissipation of the uncertainty surrounding the smoothness of the transition from military backed to civilian government _ although there is a risk it will not. Meanwhile, past official interest rate cuts and rising capacity utilisation are unambiguously positive for growth.
On balance, UBS believes the prospects for a domestic growth recovery mean that, even though export data have become more mixed, Thailand is one of the few economies globally where we see the possibility of a clear acceleration in GDP growth in 2008.
UBS looks for Thai real GDP growth to accelerate to 5.1% in 2008 from 4.4% in 2007.
Nonetheless, the world is slowing in 2008. UBS see US growth at 2%, European growth of 1.6% and 1.7% Japanese growth. The OECD economies are likely to grow below trend. For the rest of the world, the nature of the slowdown is changing. 2007 was a narrow slowdown _ US-led, and confined to certain sectors. 2008 is broader, and has brought more of the global economy into the process. This does not mean that Asia is condemned to slow to the same extent, but it will change the pattern of growth.
Paul Donovan is Deputy Head of Global Economics of UBS Investment Bank, based in London.