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Euler Hermes ACI, the US subsidiary of the Euler Hermes group, a global credit insurance provider, has issued its latest analysis of the global economy which concludes that although the IMF outlook remains positive, “negative factors loom.”
Euler Hermes said, “a more evident slowdown may be seen throughout the remainder of 2006 and into 2007. The International Monetary Fund (IMF) recently issued a positive outlook for the global economy, with rapid GDP growth of 4.9 percent for 2007 forecast – the fifth consecutive year of growth. According to the latest Euler Hermes Country Risk Bulletin, Hurricane Katrina boosted growth in the US, as the nation’s economy appeared to be slowing. Meanwhile, Europe and Japan remain relatively strong economically. Moreover, emerging markets – particularly in Asia – are providing strong positive momentum.”
Euler Hermes ACI Chief Economist Dan North commented: “Indeed, emerging markets now account for more than 50 percent of world output. The IMF believes this more balanced structure could support high growth for another decade. However, expect global imbalances, housing market bubbles and rapid consumer debt to pose continuing threats to this rosy scenario.”
Euler Hermes indicated that the “world economy seems to have hit the top of the business cycle in 2004, when the United States returned to the strong growth rates seen at the end of the 1990s and Japan emerged from stagnation.”
It also explained: “Europe continued to lag behind in this recovery phase, but US domestic demand was strong enough to boost exports from the emerging economies, with China leading the field. The turning point in the world economy came in 2005. The US economy is now slowing, Japanese growth has stopped accelerating, and the revival in Europe is too modest to counterbalance this.”
If a slowdown in the world economy occurs, it should “be more evident starting from the second half of 2006,” the bulletin continued. “The rise in US interest rates should in the end have an impact on American consumption, which is now financed by a negative rate of savings.
“In Europe, the value added tax (VAT) rise in Germany at the start of 2007 will reduce domestic consumption and exports from its European neighbors. In Asia, the deceleration in world trade will slow those economies that remain overly dependent on external demand. The financial markets suddenly became aware of this risk of slowdown last May, leading to a fall in price on European and Asian stock markets, and an inversion of interest rate curves in the United States, with long-term rates falling below short-term rates.”
Although some of these forecasts may indicate signs of “recessionary expectations,” Euler Hermes is less pessimistic. “In our view, the world economy should achieve a soft landing – notwithstanding the growth of trade imbalances – thanks to the moderation of inflation, which will again add a little purchasing power to consumers all across the globe,” concluded its Director of Research Philippe Brossard.