Banking & finance

Economists see slowdown of global economy

  • 20 November 2007

The global economy is expected to lose momentum in the last quarter of the year in all major regions, as predictions for the existing quarter and the coming six months are significantly revised downwards, according to the latest ICC/ Ifo World Economic Survey released today.

The report surveyed 1 020 economic experts in 90 countries in October, when financial markets in Europe and Asia grew volatile amid the worsening financial results of banks holding defaulted, sub-prime mortgages in the US.

The Ifo World Climate Index fell to 99.3 in the fourth quarter, down sharply from 113.6 in the previous quarter.

“The global economic expansion is softening,” said Hans-Werner Sinn, President of the Ifo Institute for Economic Research at the University of Munich. “The economic outlook for the coming six months deteriorated, and has become cautious.”

Economists expect the global economic downturn to be mild. “Assessments of the current economic situation have been only slightly downgraded, raising hope for a moderate economic cooling,” Mr Sinn added.

However, the outlook for the global economy in the medium term – over the next three to five years – remains fairly robust compared to predictions made a year ago.

The economic climate indicator dropped most in North America, especially in the US, with a larger majority of economists than in the previous survey saying they see a major risk of a US recession ahead. The economic climate outlook also deteriorated in Europe, with the least favorable perspective recorded for France. Economists only slightly downgraded their expectations for Asia.

Over the next six months, experts think the US dollar will weaken compared to other currencies even more than the US currency declined during previous quarters.

Slightly higher global inflation is expected, with inflationary pressures seen as most pronounced in the Near East, Eastern Europe and the CIS countries.Economists expressed deep concern that sovereign wealth funds, state-owned assets used for investment, will become an increasingly used pretext to introduce protectionist restrictions on foreign inward investment.

Large investment funds owned or controlled by governments arouse concern mainly on the grounds of security or political interference in business decisions. Other governments fear that these funds will buy important stakes in their country’s private companies, with the intent of taking control of strategically-important sectors, such as energy and telecommunications. The growing influence of sovereign investment funds in the financial markets triggers protectionist feelings.

“Despite the demonstrated benefits of foreign investment, world business is very troubled by a new tide of investment protectionism, i.e., deliberate actions or hints of actions by governments to deny or impede the flow of cross-border investment under the pretext of protecting ‘strategic sectors’ or ‘preserving national security,’” said Guy Sebban, Secretary General of the International Chamber of Commerce. “These actions dampen the climate for the relatively free flow of investment and reduce the benefits it brings to home and host countries,” he said. “While governments of all sovereign nations reserve the right to regulate, it is critical that they do so in a manner that does not discriminate against or impede foreign investment. Some governments have clearly gone too far,” Mr Sebban said.

Economists voiced greatest worry for interference by sovereign funds in North America, Russia, Europe, and in the Near East, especially in Israel and Turkey.