2008 Economic Forecasts from the U of Pa Wharton School

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Though the subprime mess and rising oil prices slammed the U.S. economy during much of 2007, other emerging markets -- especially China and India -- seem to be on a roll. China's growth rate of more than 11% is likely to continue, and India, too, should be able to sustain a high rate of GDP growth, even if it slows from last year's 9%. Latin America, meanwhile, is cautiously optimistic but could see a moderate decline in 2008.

UNITED STATES

How best to describe the outlook for the U.S. economy and financial markets in 2008? Uncertain at best.

High oil prices and fallout from the subprime mortgage debacle continue to threaten the economy and financial markets, according to several Wharton faculty members. Although none think a recession is guaranteed, all agree that even if a recession is averted, economic growth will be agonizingly slow. "There are a lot of unknown unknowns out there," says management professor Marshall W. Meyer.

LATIN AMERICA

Latin America's overall growth rate in 2008 will most likely face a moderate decline in 2008, according to economists, who add that their forecasts are the most optimistic for the Southern Cone countries (Argentina, Uruguay, Chile), and the least optimistic for Mexico and the Caribbean. The growing populism in the region is being watched closely by foreign investors and, according to Pampillón, presents a serious danger that populist governments in Venezuela and Ecuador "will proceed with excessive public spending programs and attempt to control prices and markets."

SPAIN

Spain, on the other side of the Atlantic, shares its culture and language with Latin America. It also maintains close economic relationships with the region. In 2008, Spain's growth rate is expected to slow to about 3%, compared with 3.8% in 2007. In 2008, notes Sebastián, "the Ibex 35, the main index on the Spanish stock exchange, will rise to about 17,000 points; the stars on the exchange will be the big companies -- electricity companies, banks, construction and telecommunications.

Spain's inflation rate was about 4.3% in December, the highest rate in a decade. In 2007, unemployment increased to 5.2% over the previous year, and the consumer confidence index fell to historic lows. Pampillón warns that these numbers can generate what is known as the "savings paradox." When there is slower growth and more unemployment, "people consume less and save more, preparing themselves for bad times. This decline, in turn, depresses the economy; families spend less and companies sell less and produce less. They also get rid of workers to compensate for the decline in sales and production. Things get worse as a result of this supposedly virtuous behavior." In that kind of situation, it's no wonder that the consensus forecast for growth in Spain in 2008 is about 2.8%, Pampillón notes.

CHINA

According to Meyer, the Chinese economy will be one of the biggest factors to influence the financial markets and world economy this year. China's huge demand for oil, metals and other commodities has pushed commodity prices up around the world. But Chinese officials are now taking unprecedented steps to slow their economy to control inflation, Meyer says. That should stop the spike in commodity prices, but it also will likely cause a slowdown in growth worldwide in 2008.

To stem inflation, Chinese officials have moved to tighten credit. Regional bank branches, which have long operated with great autonomy, are being put under stronger central control to assure that money is lent only to borrowers likely to pay it back.

The government, for example, is likely to stop subsidizing gasoline and diesel fuel. If prices for these fuels rise, demand will fall, helping to curtail the worldwide rise of oil prices. "It's inevitable that this will happen," Meyer says. "If you slow down the Chinese economy, you are going to slow down and reverse galloping petroleum and metal prices [worldwide]. I think we are coming close to the end of the commodity boom.... If this happens, people are going to be a little shaken, because the assumption has been that global growth will be driven by China and India." Meyer says he can't predict a recession in the U.S., "but I can see a slowdown in global growth because of the tightening in China."

Emerging market trade, by contrast, already accounts for half of China's trade growth, says Xie. These economies export precisely what China needs -- commodities such as oil, copper and iron ore. In return, they buy cheap Chinese-made consumer products and capital goods. "In the short term, this is going to be a huge cushion for China," says Xie. "Next year, exports will continue to grow."

For Xie, this blossoming South-South trade represents "the dawn of emerging market development." He predicts that the large foreign exchange reserves in places such as India, Russia, Dubai and even Africa will have "very important implications for what happens next year," because these economies will continue to be able to spend despite the U.S. recession.

INDIA

The Indian economy is likely to face pressures in 2008, and its 9% growth rate of recent years will feel the pain of a U.S. slowdown, according to economists and investment managers who spoke to Knowledge@Wharton. Led by rapid growth in Asia, India's fortunes are certainly getting increasingly "decoupled" from the U.S. economy, but the country faces other challenges. Inflationary pressures loom, but opinion is divided on whether that could force interest rates to rise. The increasing cost of capital is already beginning to sap retail and corporate borrowing appetites around the country.

"India has a 50% chance of suffering a painful downturn in 2008-09, a 30% chance of a mild downturn and only a 20% chance of continuing with rapid 9% growth," says Swaminathan S. Anklesaria Aiyar, a well-known Indian economist and columnist. Aiyar says he limits the chance of a painful downturn to 50% because, like many other advocates of the so-called "decoupling" theory, he sees a U.S. slump impacting India to a lesser extent now than it might have in earlier years.