The international economy.

• Author: Mafi-Kreft, Elham

The economic growth around the world looks to remain strong in 2008 despite the "financial turmoil" that we have been experiencing in the United States and, to some extent, in Europe since this summer. The International Monetary Fund (IMF) anticipates world economic growth to reach 4.8 percent in 2008, continuing a remarkable six consecutive years of strong growth for all countries around the world. This significant growth is mostly due to the dynamic nature of the emerging economies, which are growing at 8 percent to 12 percent per year. For the first time, China is the largest contributor to the world growth figures, and combined, China, India, and Russia represent more than half of global growth. However, it is important to emphasize the potential risks to this positive outlook on growth: (1) oil prices are high; (2) there are still some residual financial problems and we are uncertain when, or how, they will occur; and (3) there is risk associated with inflation, particularly in the emerging economies (see Table 1).

Europe

After five consecutive quarters of vigorous growth, the economic performance in the Euro area is projected at 2.5 percent for 2007 and an even lower 2.1 percent for 2008. The European Union growth is predicted to be 3 percent in 2007 and 2.5 percent in 2008. This expected deceleration of growth can be explained by the tightening of global credit conditions, the tighter availability of bank credit due to the U.S. housing difficulties, and high commodity prices--particularly high oil prices.

Ongoing unrest in global financial markets has increased the risk associated with the short-term outlook since this summer. Many European banks are exposed to the U.S. mortgage market, causing a crisis of confidence throughout European interbank markets. (The European Central Bank and the Bank of England have been required to safeguard these markets, but with market participants unable to identify their exposure to losses, there has been a generalized loss of investor confidence in Europe.) The impact of the crisis on the real economy is still unfolding, and if the financial turmoil persists, the risks of a significant negative impact on business and consumer confidence cannot be ignored.

The Euro currency appears to be in line with Europe's sound economic fundamentals, but countries such as France, Portugal, and Spain, whose export prospects lack a sufficient cushion in competitiveness, will likely undergo economic weakening from...