Economics Weekly By Lloyds TSB

With second quarter gdp data now available for the main economies, this might be a good time to look at how global economic growth has performed so far in 2008. Chart a shows that Q2 growth is currently much lower than in the year earlier in all of the major economies.

High global inflation has hit economic growth

 

With second quarter gdp data now available for the main economies, this might be a good time to look at how global economic growth has performed so far in 2008. Chart a shows that Q2 growth is currently much lower than in the year earlier in all of the major economies. Of course, the world economy has been hit by two major shocks in the last 12 months, the bursting of the credit bubble and a big rise in global inflation.
Although the two effects are difficult to separate – both are at work to reduce the pace of economic activity – the sharp rise in price inflation appears to have more obviously hit household incomes, raised firms’ costs and led to weaker growth. Tighter lending conditions have intensified the slowdown. As a result of this, consensus forecasts for economic growth have been lowered sharply for this year and next, see charts b and c, mirroring the rise in forecasts of price inflation.

 

Economic growth has been revised lower…

 

We have been continually revising our forecasts for the global economy to reflect the worsening trend of recent economic data. Indeed, a scenario we carried out in May suggested that the biggest risk facing the world economy was higher than expected inflation, partly driven by rising oil and food prices resulting from fast growth in the emerging markets and loose monetary policy in the developed countries in the last five years. Unfortunately, events have moved closer to this more negative scenario for economic growth than in our central forecast at the time. However, it is still likely that
the world economy will avoid recession, with the US showing tentative signs of also avoiding recession, but growth in the UK, Japan and the eurozone continues to weaken more than expected earlier in the year.

 

…as price inflation has proved sharply higher than expected…

 

Despite all the worries about the bursting of the credit bubble, and the initial assumption that this would lead to lower inflation as growth weakened – as individuals and companies were prevented from borrowing as much as they would like and so cut spending – it is ironic that it is, in fact, accelerating price inflation that has negatively impacted the real economy most severely in the last few months. It may be that the economic effects of the credit crisis are slow burning though the
impact on banks and financial markets are plain to see. After all, the reduction in credit availability must be acting to weaken economic growth more than otherwise, but it is not enough to prevent price inflation from rising, at least in the short term, while the upward pressure from higher oil and food prices is so great. More worrying is the fact that core price inflation, which excludes the effects of energy prices and food, is also rising even as economic growth weakens.

 

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