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Philippe d’Arvisenet Global Chief Economist ECONOMIC RESEARCH DEPARTMENT. THE WORLD ECONOMIC OUTLOOK AMSTERDAM, March 2007. Chart 1. Chart 2. I - UNITED STATES. BELOW POTENTIAL GROWTH IN 2007 The housing market correction is not over yet
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Philippe d’ArvisenetGlobal Chief Economist ECONOMIC RESEARCH DEPARTMENT THE WORLD ECONOMIC OUTLOOK AMSTERDAM, March 2007
BELOW POTENTIAL GROWTH IN 2007 • The housing market correction is not over yet • Slowdown mitigated by temporary phenomenon: oil prices down, unexpected warm weather... • Consumption is expected to weaken • GDP growth close to 2% in 2007 • But the economy will rebound later : once inventory correction (housing and industry) is over
LOWER INFLATIONARY PRESSURES • Upward pressures from energy prices have receded • Gradual decline in core inflation • Slower growth in activity alleviate tensions • Increases in shelter costs to moderate • Fed • Fed’s view to change • Ease expected for the end of Q2 EXTERNAL IMBALANCES • The current account deficit is expected to remain close to 6.5% GDP • Slower domestic demand and a weaker dollar should limit the slippage
ECONOMIC ACTIVITY • Growth above potential in 2006 • Solid domestic demand. • Weak external sector (with the exception of Germany) • Deceleration in 2007 • Impact of VAT hike in H1 2007 (however, lower-than-expected) • External demand: the impact of US slowdown • Impact of the Euro appreciation • Lagging impact of monetary tightening
Inflation : what ECB looks at • Pressure on core inflation • Wage negotiations (Germany and Italy) • Higher capacity use rebuilds pricing power • Headline inflation impacted by favourable base effects until summer • Monetary stance • M3 growth reached a record high since the launch of the Euro • Lending to household is slowing, lending to corporate is accelerating • Interest rates are entering in neutral territory • Refi rate at 4% in mid-2007. A pause is to follow
STRUCTURAL ISSUES • Challenges : • low potential growth • the cost of aging • A lot remains to be done : • fiscal consolidation • goods market reform (privatization, competition, barriers to entry etc…) • labour market reform (disincentives to work, disincentives to create jobs have to be addressed…) • The political impediments
ECONOMIC GROWTH HEADING TOWARDS A SOFT PATCH • GDP growth, 2.2% in 2006, likely to decelerate below potential in H1 07, before accelerating again, up 2% at most in 2007 • Final domestic demand is supportive • Inventories correction will substact to growth early in 2007 • Slowdown in exports but also in investment
BoJ hiked last month • Credibility issue, risks seen with asset prices • BoJ will remain cautious (long pause expected) • The yen should gradually strengthen versus the dollar (unwinding of carry trade...) • Japan core inflation at zero and below zero with international standards