Every month I receive a newsletter from the Idaho State Department of Finance. The last issue gave their top 10 predictions for 2008. I always find their predictions interesting. They aren’t always correct, but always worth the read.
1. They are predicting that the US economic growth will slow to 1.7% in 2008, which will be its weakest showing for the next few years. The saving grace will be exports because of the weak dollar.
2. Most of the European countries will suffer the same slowdown that the US will feel. Even with a stronger currency, they will also suffer from a credit crunch and the higher cost of oil. The pacific-rim countries will suffer from some of the same housing related problems and their economic growth will be offset by strong oil prices.
3. China will continue on its economic tear though the Olympics. Credit growth is getting a little out of hand however and the prediction is that they will tighten credit once the Olympics are over.
4. Some time during 2008, oil prices should fall to $75-$80 dollars a barrel because of the world wide slow down in economies. However, any disruption in production could send prices back up.
5. US Core inflation will edge down word. With our economy operating a well below its potential, we will see an increase in the unemployment rate, this will put downward pressure on core inflation.
6. Expect the Fed to continue to cut interest rates. The Central Bank lowered the federal funds rate by 25 basis points on Dec. 11th, and they are expected to lower it again by 50 basis points in January followed by another 25 basis points in March. If the housing crunch gets any worse, the Federal Reserve will need to inject more liquidity into the financial system, (Money), and support the subprime mortgage relief.
7. Good news, the housing sector will bottom out in mid-2008. Bad news, nationally prices will continue to fall at least through 2009 by an additional 10 %. (These figures come from the Office of Federal Housing Enterprise Oversight. My personal opinion is we can’t judge local markets by national numbers.)
8. Our economy will be slower than the rest of the rest of the world and with a weak dollar exports will be supercharged. Our balance of trade deficit will drop dramatically and this positive trade contribution will prevent the US economy from slipping into a recession.
9. The Department thinks the dollar will hit bottom against some foreign currencies in 2008. It has been sliding since 2002 and recent weakness is a function of the sub prime crisis and the possibility of a US recession. If recession fears ebb, the dollar should begin to recover by the middle of 2008, however Japanese and Chinese currencies will continue to appreciate because of huge trade deficits.
10. Our economy is still very vulnerable because of housing/subprime crisis and higher oil prices. If oil prices fall to the $75-$80 per barrel range the US should not go into a recession. If prices go up or some other shock to the economy occurs, it could cause the economy to retreat.
All predictions are from Idaho Division of Financial Management’s December Newsletter Volume XXX No. 6
