MAPI: World economic outlook to withstand slow U.S. growth

Current data reveals that the strong global economic growth of the last three years should continue, and become the strongest sustained period of growth in a generation, according to a quarterly report released July 18 by the Manufacturers Alliance/MAPI. The analysis further concludes that consumer spending outside the United States may begin to play a greater role in global activity, boding well for the sustainability of solid world growth.

In the "MAPI Quarterly Forecast of U.S. Exports, Global Growth, and the Dollar: Third Quarter 2006 Through Second Quarter 2008 (ER-610e)," economist Cliff Waldman cautions that while uncertainties do exist — specifically an increase in market interest rates in the industrialized countries, a rise in the U.S. core consumer price inflation, geopolitical instability, and uncertainty over U.S. monetary policy and the U.S. economy — the global economic picture will remain a relatively bright one during the next few years.

Strong global demand and a falling dollar are expected to stimulate U.S. export growth of 7.7 percent in 2006, an increase from 6.9 percent in 2005, and then accelerate to 9.4 percent during 2007.

Growth in the industrialized countries, which include Canada, the Eurozone and Japan, is anticipated to gradually strengthen from an estimated 3.2 percent in the second quarter of 2006 to 3.5 percent during the second half of 2006 as the U.K. and Eurozone economies improve. As a result of an anticipated eventual slowdown in the Chinese and U.S. economies, however, growth will subsequently decelerate to an average of 3.1 percent in the first half of 2007 and then to 2.8 percent in the second half of 2007 and first half of 2008.

Growth in the developing countries, which include China, India, Latin America, Mexico and the Pacific Rim (excluding Japan), is expected to accelerate from 5.3 percent during the second quarter of 2006 to 5.5 percent in the second half of 2006. Growth is subsequently expected to slow to an average of 5.0 percent during the first half of 2007 and 4.8 percent in the second half of 2007 as Chinese and Indian growth slows. As the Chinese and Indian economies resume trend growth, cumulative developing country growth is expected to return to 5.1 percent during the first half of 2008.

“Financial market fears regarding inflation pressures in the United States and industrialized countries are not without merit,” Waldman said, “but the increasing breadth and stability of demand in the weaker regions should keep global growth on a solid, if more moderate, track for the next few years.”

The report projects that the strengthening growth in the Eurozone and Japan, coupled with forecasts of a U.S. growth slowdown, point to a modest bear market for the dollar. MAPI expects the dollar to fall by 4 percent against the currencies of the industrialized countries during the third quarter of 2006, followed by a 3 percent gain during the fourth quarter of 2006, before becoming flat in the first quarter of 2007, reflecting the belief that dollar depreciations are episodic and seldom smooth. As global growth and interest rate adjustments conclude, the structural U.S. trade deficit will once again dominate currency market thinking. The dollar, as a result, is expected to fall by 7 percent in the second and third quarters of 2007, and by 3 percent during the fourth quarter of 2007 and first quarter of 2008, before remaining flat during the second quarter of 2008.

Against the developing country currencies, the dollar is expected to depreciate by 7 percent during the third quarter of 2006 and then fall by another 3 percent in the fourth quarter of 2006. Following a flat first quarter in 2007, the dollar is predicted to appreciate modestly (between 0.5 percent and 2.5 percent on a compounded annual basis) through and including the second quarter of 2008 as China and India experience economic slowdowns, which should be dollar-friendly for a short period of time.