EconSouth (Fourth Quarter 2006)

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Volume 8, Number 4
Fourth Quarter 2006


Housing, Energy Loom Large in '07

Southeastern Economy to Grow Modestly in 2007

Global Outlook Generally Bright in '07

Carpeting on a Roll in Georgia


Fed @ Issue

Q & A

Research Notes & News

Southeastern Economic Indicators



Global Outlook Generally Bright in '07

The outlook for foreign economic growth remains positive, with broad-based expansion in most industrialized economies, ongoing strong growth in the developing world, and solid global trade activity.

city lights in China
With China and India providing much of the momentum, Asia is home to the world's fastest-growing economies. Strong demand from emerging Asia and other developing economies has the world economy well positioned to withstand a deceleration in demand from the United States.
Economies around the world are set to maintain the impressive growth most saw in 2006. Even some anticipated slowdowns in developed economies have not dampened expectations for ongoing growth throughout most of the world, especially in developing countries. Outside the United States, economic growth accelerated to just over 4 percent in 2006 compared with 3.5 percent growth in 2005.

Most analysts believe that in 2007 foreign gross domestic product (GDP) growth should moderate to around 3.5 percent, mostly because of an anticipated slowdown in some industrialized economies (see chart 1). While the expansion in foreign industrialized economies should slow in 2007 to around 2 percent from almost 3 percent in 2006, economic activity in developing countries should maintain its impressive pace of about 6.5 percent.

In advanced economies, growth decelerates but remains solid
Following several years of subpar growth, the euro area's economic performance exceeded expectations in 2006 as activity picked up considerably across most countries and sectors. A year ago, analysts expected about 2 percent GDP growth for the euro area in 2006, but 2006 experienced close to 3 percent GDP growth. Robust export growth and strong business investment have led the current expansion. Consumer spending also has improved in the past year, supported by strong credit and employment growth.

Although economic prospects are mostly optimistic for the euro region, GDP growth should decelerate from just under 3 percent in 2006 to around 2 percent in 2007, largely the result of the anticipated negative effects on consumer spending from a planned tax increase in Germany. Also, effects of the euro's appreciation over the past year may dampen exports. Meanwhile, the European Central Bank has implemented several interest rate increases since December 2005, which could reduce business investment growth in 2007.

Related Links
On the Web:
World Bank
IMF's World Economic Outlook
Inter-American Development Bank
European Central Bank's monthly bulletin

Economic recovery in Japan remained firmly on track in 2006, underpinned by the ongoing expansion in the corporate sector. Business investment and exports grew at a robust pace, stimulated by high corporate earnings, the weak yen, and strong external demand. After having grown at just under 3 percent in 2006, GDP should decelerate to around 2 percent in 2007 as growth in exports and business investment slows. Also, rising tax and social security contributions may restrain consumer spending.

After years of entrenched deflation, Japan's consumer inflation rate turned positive in May 2006. In response to the improving GDP and price data, Japan's central bank increased its interest rate in July 2006, ending more than five years of its zero-interest rate policy.

In Canada, the economy appears to be slowing. The main culprit is a considerable appreciation of the Canadian dollar, which has curbed prospects for strong growth in the country's sizable export sector. Residential investment also is showing signs of cooling off, indicating downward pressure on housing-related consumer spending.

Following GDP growth of nearly 3 percent during 2006, the Bank of Canada's outlook is for growth of about 2.5 percent in 2007. This lower projection is related to expectations for some slowing in the U.S. economy, a development that could affect Canada's export sector.

Latin America growth remains strong
Developing economies continue to power ahead, enjoying solid global demand for their exports and strong capital inflows as a result. In the near term, raw material exporters should continue to benefit from high commodity prices. Also, many developing countries have implemented market-friendly reforms and reduced external liabilities, thus boosting their growth potential over the longer term.

Chart 1
Changes in Foreign Gross Domestic Product, 2001–07
Georgia employment growth chart
Source: Economist Intelligence Unit

Following 2006's impressive GDP growth rate of over 4.5 percent, Latin America's economy should expand by a solid 3.9 percent in 2007. Rich in natural resources, Latin America has been one of the main beneficiaries of high commodity prices. Beyond strong commodity-driven exports, domestic demand has become a major driver of economic growth.

The region's 2006 elections should ensure continuation of stable economic policies in most countries. Although some of the elections (such as Mexico's) were closely contested, no major financial market disruptions occurred. Boosted by strong regional growth, capital inflows remained elevated in 2006 and should remain high in 2007.

In Asia, strong expansion continues
Emerging Asia—which the International Monetary Fund defines as all Asian countries except Australia, Japan, and New Zealand—remains the fastest-growing region in the world, with much of the momentum coming from strong expansions in China and India. Even excluding China and India, emerging Asia's economy is forecast to grow an impressive 6 percent in 2007 after having expanded by 5.5 percent in 2006.

Large importers of raw materials, such as China, should more than offset their higher production costs with gains from the world market's ongoing buoyant demand for its products. China's GDP should maintain its impressive 10 percent growth in 2007, as all major sectors of its economy continue to grow at a blistering pace, led by exports and business investment. Strong capital inflows and a massive trade surplus have fueled an investment boom in China.

Chart 2
Share of World Imports, 2001–07
Georgia employment growth chart
Source: Economist Intelligence Unit

But the extremely high investment growth and relatively weak consumer spending have raised concerns among many analysts and policymakers about the potential overheating of the Chinese economy. To correct economic imbalance, the government is taking steps to encourage more consumption and less investment. In addition, Chinese authorities have recently implemented a set of administrative measures aimed at stemming overinvestment in several industries. Still, it is not clear that these measures will be sufficient to cause China's economy to slow down materially anytime soon.

India's strong economic growth appears poised to continue, boosted by robust growth in the service and manufacturing sectors. Following an increase of just under 8 percent in 2006, real GDP is forecast to slow only marginally, to around 7.4 percent, in 2007.

Emerging Asia's expansion offsets global dependence on U.S. imports
Although the United States is a major world importer, its share of total world imports has been steadily declining over the past few years (see chart 2). This decline has been in part offset by a steady increase in import demand from emerging Asia, particularly China.

In 2007, the United States will likely account for 15 percent of world imports against emerging Asia's 22 percent. The United States remains China's number-one export market, and exports to the United States accounted for one-fifth of China's GDP growth in 2005.

city lights in China
Global trade should remain strong in 2007. With manufacturing-based economies enjoying boom times, raw material suppliers are riding a rising tide of demand.

However, even without that contribution, China's growth would still have been impressive at more than 8 percent. In fact, China exports almost as much to the European Union as it does to the United States, and the amount heading to Europe is growing faster than the amount coming to the United States.

The U.S. share of all of Asia's exports has fallen from 25 percent to 20 percent over the past five years, while trade among Asian countries has increased, supporting the region's economic growth. European manufacturers have significantly increased their exports to Asia in the past few years and are now less dependent on shipments to the United States.

China's and India's strong appetites for raw materials should help keep commodity prices elevated, thus ensuring a continued income stream for commodity-exporting countries, many of them in Latin America.

Risks to global growth lurk
While growth prospects are generally favorable for the world economy, several risks remain, including higher interest rates due to tightening measures of many central banks, a renewed run-up in energy prices, or a sharper-than-expected downturn in the U.S. economy. In particular, a slowdown in the United States has historically been a significant drag on global economic growth. However, because of strong demand from emerging Asia and other developing economies, the world economy now appears to be somewhat better prepared to withstand a deceleration in demand from the United States.

On the whole, while the forecast of somewhat slower growth for the U.S. economy in the near term will undoubtedly affect international economic growth, the current global expansion should continue in 2007.

This article was written by Galina Alexeenko of the regional section of the Atlanta Fed's research department. The international estimates and forecasts represent a consensus of private-sector or multilateral outlooks and are not those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.