YEARENDER: With US woes, world faces 2008 economic slowdown

Dec 27, 2007, 5:02 GMT

Washington - As the US economy seems headed for a sharp slowdown in 2008, the big question is who can pick up the slack.

Analysts who promoted the notion that Europe, Japan and emerging nations would rescue the world economy are backtracking as the US housing-market bubble collapses into what could be an extended global slump.

The stakes go beyond Wall Street: in a US presidential election year, economic uncertainty and the plight of homeowners struggling to pay their mortgages are emerging as campaign issues as the Democratic Party battles to win back the White House.

Harvard economist Kenneth Rogoff says it may not matter whether the US expansion just slows or goes into reverse for a quarter or two. In the consumer-driven American economy, it's the mood that counts.

'It's going to feel like a recession,' he said in a telephone interview. 'I think we're looking at a couple of years of slow growth in the United States.'

When shaky loans to US homebuyers set off the subprime crisis in August, 2007 was already shaping up as slower than the year before.

Now, concern is rife that the fiasco's fallout in the broader US economy, high oil prices and tighter credit worldwide as a result of the mortgage crisis will conspire to slow growth worldwide in 2008.

The International Monetary Fund slashed its 2008 outlook for the US and the world in October, and 'most of the news has been bad' since then, IMF chief economist Simon Johnson said.

Central banks have stepped in. The Federal Reserve cut US interest rates and joined with others to pump cash into financial markets, aiming to lower borrowing costs and stave off recession. But inflation risks limit the scope of action for central banks.

'All of this makes for a fairly difficult 2008,' Johnson told Deutsche Presse-Agentur dpa.

Over the past year, talk that emerging nations could insulate themselves from trouble in rich economies was fashionable as new powerhouses like China weathered the subprime shock remarkably well.

That 'decoupling' is less likely to happen in 2008, economists believe. Higher energy prices and weaker growth prospects in rich countries could dampen the outlook also for emerging economies, the IMF says.

After all, the United States still accounts for a quarter of the world's economy and US consumers have fuelled growth in countries like China and Japan.

'Decoupling is way overblown,' Rogoff said. 'If the US has a big downturn, it's pretty painful.'

Europe, too, is expected to see slow growth because of the sluggish US economy, the strong euro and high energy prices.

Wall Street securities firm Morgan Stanley, which predicts a 'mild recession' for the US in 2008, shaved its growth forecast for the 13- nation euro area to 1.2 per cent from 1.6 per cent.

Much will depend on whether US consumers, fuelled for years by the rising value of their homes, will retreat now that their wealth is eroding.

'It's just hard to imagine that US households will continue to consume, or not save, in the same way as before,' Johnson said.

Yet US consumer spending rose in November by the most in two years, surging 1.1 per cent from October as early holiday-season discounts lured shoppers.

And predictions that Americans will chill the world economy by slashing their shopping-mall sprees have repeatedly proved wrong over the past decade, Johnson said.

Banks' losses on subprime mortgages and investment products linked to those home loans are another big question mark.

So far, losses are estimated at less than 80 billion dollars. But the IMF's Johnson says they could rise to between 150 billion dollars and 300 billion dollars.

If that happens, the damage will be more manageable if the losses are spread widely throughout the global financial system. And that will be a key influence on the growth outlook.

'We don't know where those losses are,' Johnson said. 'This is the main wild card in thinking about 2008 and 2009.'