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US investment bank Goldman Sachs warns of a likely recession in Japan and mounting risks that US property slump could spread to parts of Europe. In a report, The Global Economy Hits a Crunch*, the bank said it was no longer sure that Asia and Europe would be able to pick up the growth baton as America stumbled. It fears that turmoil is spreading beyond the debt markets to the factory floor. However, the Euroframe grouping of Europe's top 10 economic institutes, including Ireland's ESRI, said in its biennial report on the Eurozone economy that was published yesterday, that growth would remain robust in the second half of 2007 and would slow only moderately in 2008/09. The Institutes say that the impact of the credit crunch that was sparked by the US subprime home lending crisis, will be limited. Also on Thursday, it was reported that in Germany, which is responsible for 27% of Eurozone GDP, August unemployment fell to a 14-year low. While the Eurozone has become less dependent on the US market for exports, a sharp US slowdown would be serious for Europe and in particular Ireland because of the dominant role of US multinationals in Ireland's economy.. The share of Eurozone exports going to China and Russia has risen from 5% to 7% between 2002 and 2006, while the US’s share has fallen by 2 percentage points. But the US is still the biggest market, after the UK, buying 14% of exports – the same as in 1997. "Much has changed since mid-July, when we wrote that 'the global economy continues to enjoy one of the strongest sustained expansion in modern history'. The mood in financial markets is clearly darker, and the economic data in the developed world is showing signs of wear," the Goldman Sachs report said. "Japan's recovery is tottering, with the chance of an outright recession having risen to nearly two in three," said the report, authored by chief economist Jim O'Neill. Japan is the world's second biggest economy and top creditor with some $3,000bn in net foreign assets. Growth contracted an annual rate of 1.2% in the second quarter before the credit crisis hit. On Thursday, it was reported that Japan's trade surplus had surged, boosted by car exports in a month when domestic car sales fell for the 26th straight month. In March 2007, car sales in Japan fell, to a 30-year low. (SEE: Economist Pocket World in Figures 2008: Quality of life best in cold Norway and Iceland - Ireland 4th and Japan 7th where domestic car sales have hit 30-year low and high level of anxiety about daily lives is at 40-year high) Wages have fallen for the last eight months in a row. They are now down 1.9% and the Bank of Japan's key interest rate is at 0.5%. Goldman Sachs feared it was now "inevitable" that consumers would batten down the hatches for a while. The bank said Europe is now so weak after a clutch of dire confidence surveys in Germany, Italy, France, and The Netherlands that any further rate rises by the European Central Bank are "off the table". The Masters of the Universe would hardly bet their bonuses on that bold prediction! GS expects the euro to fall back to $1.35 against the dollar over the next year, and sterling to tumble to $1.88 as the Bank of England cuts interest rates three times. The one bright area is the 'BRIC' quartet of Brazil, Russia, India, and China, all still firing on four cylinders, if slowing slightly. *No online version publicly available Global Housing Booms In a separate report, Rising Risks to the Global Housing Market, Goldman Sachs said that much of the global system had succumbed to a property boom that is in some ways more stretched than in the US, with real (inflation-adjusted) house price rises of over 100% in France, 60% in Italy, 55% in Canada, and 72% in Australia since the late 1990s. The bubbles in Spain and and Ireland have been more extreme. “With the notable exception of Japan and Germany, home prices have risen significantly in all the largest OECD economies,” Goldman’s Peter Berezin says in the report. “Indeed, the performance of the US housing market has lagged the rest of the OECD. Whereas home prices in the US increased by about 50% between 1990 and 2006, the average increase in the rest of the OECD was closer to 70%.” "Such a widespread housing boom has little precedent in modern history. In those markets where prices have run up the most, and rental yields have fallen dramatically, the risks of a housing correction are likely to have increased materially," Berezin said in his report . "The wealth effect for housing is about twice as large as for equities, with consumption falling by about two cents in the short run for every $1 decline in home prices," he said. He expects US house prices to fall 7% in 2007 and another 7% in 2008, as mortgage lenders continue to tighten credit to large chunks of the market. "The US is often a leading indicator for what happens in the rest of the world". Berezin said construction booms usually lead to housing busts lasting several years. Residential construction in the US reached 6.3% of GDP at the peak of the bubble, the highest since the baby boom in the early 1950s. He said fundamental factors such as low real interest rates and income growth explain much of the price gains, but some do appear overvalued. The markets that are the most vulnerable are those where, as in the US, home construction has outstripped historic norms, threatening prices with an excess of supply. At greatest risk, the report suggests, are Ireland, where construction in 2005-2006 was double the OECD average since 1990 and where the ratio of home prices to rents has tripled since 1990. Next is Spain, where construction has averaged 8.7% of GDP since 2003 compared to 5.1% over the preceding 13 years. In both countries, prices have begun to decline. The UK, Australia and Canada are also vulnerable because of elevated construction levels, the report says. To be sure, he acknowledges, prices leveled off in 2005 in the UK before taking off again. Berezin said the Goldman's "decoupling" thesis was based on the assumption that the US housing slump was a "country-specific-shock" that would not spill over into other economies. This was now in doubt. "The spread of global credit risks has introduced a new potential transmission mechanism. If home prices in the key economies begin to fall, this will have an adverse effect on global growth," he said. Related © Copyright 2007 by Finfacts.com |
