EoW July 2007

But the Washington-based overseer of the global financial system saw the strain of the housing slump as confined largely to the US, with little evident impact on economic activity in the rest of the world. Even so, the dangers of a widening effect are real enough. The IMF warned of trouble ahead if the stasis in housing were to spread throughout the US economy, forcing cutbacks in consumer spending and business investment. And another element is emerging: several big mortgagors – lenders in the so-called sub-prime market during the palmy days of the housing boom – are collapsing as a result of mortgages they extended to people with weak credit. And, if defaults by mortgagees infect the broader lending market and lead to a general tightening of credit, the implications become more ominous. “Such a development could imply a deeper and more prolonged slowdown or even a recession in the United States, with potential spillovers to other countries,” the IMF report stated. The two countries most likely to experience a spillover effect from economic problems in the US – its neighbours Canada and Mexico – are expected to show economic growth of 2.4% and 3.4%, respectively, this year. Both projections are somewhat weaker than in the previous IMF forecast. The IMF, whose membership roughly parallels that of the United Nations, collects and analyses financial data from at least 185 countries. It sees several of these picking up the slack from slower economic activity in the United States. In Europe, the IMF is projecting Germany’s economy to expand by 1.8% this year and 1.9% next year. Britain should see economic growth of 2.9% this year, better than in an earlier IMF projection. Next year, British growth should slow to 2.7%. Russia is expected to see economic activity increase by 6.4% this year, compared with 6.7% last year. In 2008, the Russian economy is expected to grow by 5.9%. ❈ “If the US consumer were to collapse because of the housing market, the Federal Reserve would cut rates and the dollar-euro ratio would shoot up. That could be a killer for Europe.” So said Nicolas Sobczak, senior European economist at Goldman Sachs in Paris, in an interview with the New York Times in the spring. But his remark was in the context of an article on a resurgent Germany well able to resist the effects of a US slowdown – to the incidental benefit of less vibrant European states. The Times ’s Mark Landler cited the export-driven recovery in Germany – the world’s largest exporter of goods for the last four years – as one more sign that the wider world does not depend as much on the American economy as it once did. (“Germany’s Export-Led Economy Finds Global Niche,” 13 th April). In support of this view, Alexander von Witzleben, who heads a German maker of lasers and sensors, noted that Germany now exports more to Russia and the former Soviet satellites than it does to the United States. It ships nearly as much to Britain as to America, and its total exports within Europe are five times its shipments to the United States. Alone, Germany accounts for 20% of the economic activity of the European Union. Mr von Witzleben’s own company, Jenoptik, in Jena in the formerly depressed east, has orders on its books from Europe, Russia, China and the United States. Not even the surging euro, which has recently traded at historic highs against the US dollar, has dented demand for such Jenoptik products as the ‘star sensors’ that navigate satellites in orbit. Boeing Co (Chicago) has installed Jenoptik sensors in its satellites that beam television signals to American homes. Mr von Witzleben told the Times: “If I said to you 15 years ago that this former Communist combine would become a preferred supplier to Boeing, you would have told me to stop drinking wine.” Dorothy Fabian – USA Editor Its edge regained, Germany is poised to take up the slack from downturn in the US.

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EuroWire – July 2007