In reversal, poorer countries, not U.S., seen boosting 2008 global GDP

Headwinds slow global GDP

Further, a weaker dollar, the possibility of a U.S. recession and potential financial market volatility threaten the soft-landing scenario for the global economy in 2008, the bank said, and would cut export revenues and capital inflows for developing countries. However, the bank added that it expects developing country growth to moderate only somewhat over the next two years, if the U.S. slowdown is not severe.

"Overall, it's a global GDP forecast that reflects the slowdown in the U.S. economy," economist David H. Wang told BloggingStocks on Wednesday. "A 3.6% global growth rate for 2008 is not ideal for the global economy, and it's well below the world's growth capacity, but given the headwinds and the number of economic concerns, I think it's safe to say that most economists and countries would take it, if it ends up being that strong by the end of 2008."

In H1 2007, industrial production sped up across the developing regions, notably in East Asia (up 20%, year-over-year). China, India, and Russia were instrumental in driving up output, the bank said.

The bank's 2008 GDP growth projections for the world's regions are as follows:

• Asia and the Pacific, 9%, with China growing more than 11%;
• Europe/Central Asia, 6.1%;
• Latin America/Caribbean, 4.3%;
• Middle East/North Africa, 5.4%;
• and Sub-Saharan Africa, 6.4%.

Resiliency impresses

Wang said he and other economists are pleasantly surprised, "and frankly, a little amazed" by the resiliency of both the U.S. and global economies, to date.

"We've had a number of jolts, oil's large price rise, the housing sector's correction, rising inflation and commodity prices, trade deficits in the U.S. and EU, and yet the global economy is still doing OK," Wang said. "The U.S. economy is nearing recession, but the point here is that people thought a recession would occur when oil hit $60. The U.S. and the world have encountered all these jolts, but it's still holding up reasonably well, so far." He added that there's also been some good news for the U.S.: a lower trade deficit as U.S. exports increase, due to the weak dollar.

However, Wang cautioned that global GDP performance could deteriorate if economic conditions continue to weaken in the United States.

"That's the $64,000 question on economists' radar screens: Will the Fed's interest rate cuts and other stimulus action limit the U.S.'s economic slump and jump-start the economy?" Wang said. "And, as a companion matter, we also want to see if foreign investment and developing market demand, for the first time, can spur economic growth in the United States. Right now, the answer is not known, but we'll have a better idea if that is the case as we get more data on the U.S. economy as 2008 progresses."