Tough Times Ahead?
Economic meltdown looks unlikely, but rising tensions with the East will dominate the year.
Gordon Brown says that Britain should brace itself; the FT warns that the outlook for the economy is the worst since the bursting of the dotcom bubble; retailers fear a prolonged period of belt tightening.
For once, the politicians, the economic forecasters and the business are in agreement – this year is going to be tough. The only question is how tough? Could this be the "big one", that start of the Great Depression to match that of the Thirties?
The Cassandras predicting as much are in the minority, but the new year's explosive opening certainly gave them plenty of ammunition for their perfect storm thesis. Gold shot to record levels as investors took fright at the prospect of a US recession; the oil price broke through the landmark $100 per barrel; and the Dow Jones slumped; all this against a background of continued paralysis in the credit markets and an ongoing housing slump.
Given all the drama, it's easy to forget that the official outlook for the UK is one of continuing, albeit slowing growth. Britain won't tip into recession, though it's hard to find much cause for optimism as we enter 2008. Indeed, the risks for the global economy as a whole are now overwhelmingly on the downside.
Although US recession is by no means a foregone conclusion it is unlikely the rest of the world will be able to shrug off the expected sharp deceleration in spending by American households. The chief hope remains the decoupling theory: that China and other emerging economies can continue powering on independently, thus shoring up everyone else. But that ignores the risk of a post-Olympic slowdown in China – or even a bust.
There's no sign of that in Beijing. Indeed, 2008 looks like becoming the year in which China asserts its status as the world's new superpower by flexing frightening economic muscle on international markets. When Wall Street banks are being bailed out by Chinese and Middle Eastern sovereign funds, you know there's trouble ahead; in fact the biggest theme of the year will be an acceleration in the transfer of power from West to East.
The real question is how America reacts. Will the US presidential candidates end up committing the country to protectionist measures against China? If so, how will China's leaders respond? There's a good deal else to fret about, but that seems the most worrying question for the world's investors in 2008.
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