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- Three factors – rising food and oil prices, the real estate crisis which has spread from the USA to hit Europe, and tightening credit conditions – are holding back growth in industrialised nations. Forecasts continue to be affected by an exceptionally high level of uncertainty
- Exports from the USA and UK are enjoying a boost from the weakness of their currencies; the euro zone is suffering from the reverse effect
- In the USA, personal tax credits are holding back the risk of recession for the short term, but could see the pendulum swing back with a vengeance at the end of this year or beginning of next. Thus we expect growth to come out close to 1.5% in 2008 and 0.7% in 2009. Meanwhile, growth will run below 1.5% in both 2008 and 2009 in Japan, but drop from 1.6% in 2008 to 1.2% in 2009 in the euro zone
- Central banks need to anchor inflation expectations whilst also tackling the worsening prospects for growth. In the short term, interest rates are likely to be held steady both in the USA and, following the 25bp increase in the refi rate on 3 July, in the euro zone. However, the risk is clearly towards a tightening of monetary policy in the short term
- The dollar will continue to rise in the short term. It could gain ground against the euro in the fourth quarter, when the downturn in the euro zone becomes more obvious
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