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A continued surge in exports and a rise in business investment will support 2 percent real GDP growth for 2008, with about a one-third risk of recession that will be particularly acute during the first half of the year, said Michael Mussa, senior fellow of the Peter G. Peterson Institute for International Economics. “This risk reflects the danger that a number of things could go wrong and slow the economy below its stall speed,” Mussa said during the 2008 Business Forecast at Hyatt Regency Chicago December 5.
Consumer spending could run out of gas, exports could disappoint, and the recent boom in commercial construction could reverse, he said. However, write-downs in the values of existing financial assets on the balance sheets of banks and brokerages could have relatively little real economic effect, Mussa said. “U.S. economic growth could surprise on the upside and achieve or even exceed the Bush administration’s recently released forecast of a 2.7 percent rise in real GDP,” he said.
The coming year will be one of heightened political risk, mounting global anger against the United States, and continued international tensions, said Marvin Zonis, professor emeritus of business administration. “Some of the increased perceptions of risk will come from the fact that 2008 will be another election year,” Zonis said. “An election year inevitably means poor public policy as politicians focus on keeping their jobs by buying off the electorate.”
Rage in Washington D.C. against President Bush is obvious among Democrats but more startling among Republicans who “have come to despise Bush, not necessarily because they disagree with his political positions, but because he has put their re-elections at risk,” Zonis said. “The President is not a lame duck, but a mortally wounded one,” he said. “The principal result will not so much be bad public policy in 2008, but it will be no public policy.”
The electorate will be even unhappier in November 2008 than polls showed in November 2007, Zonis said. Democrats will strengthen their holds on both houses and former University of Chicago Law School teacher Barack Obama will defeat Rudy Giuliani or John McCain - “and I’m betting it will be Giuliani” - to become the next president of the United States, he said.
Because of gloomy forecasts for the United States, world GDP growth at purchasing power parity exchange rates is expected to slow from about 5 percent during 2007 to 4.5 percent in 2008, said Raghuram Rajan, Eric Gleacher Distinguished Service Professor of Finance. “Whether the United States moves into recession is really only an academic issue, for the next two quarters will be painfully slow, between 0 and 1 percent growth in GDP,” Rajan said. “But barring a low probability default by a major financial institution, trend growth should resume by the second or third quarter of next year.”
Emerging markets, which exceeded the contribution of developed countries to world growth during 2007, will face challenges increasing demand within their own counties as growth slows in industrial countries, he said. “This may well herald a sea change in some of their strategies, including that of China,” Rajan said. “The risks to the overall forecast are, however, predominantly to the downside.”
- Phil Rockrohr