China and USA will have the greatest impact on the world economy in 2008

Contact: Sonja Ludvig
Deloitte in Bosnia and Herzegovina
Corporate communications senior coordinator
+ 385 1 2351 900

Global economy is currently undergoing a transition from one era of economic expansion to another. The transition itself was brought by the bursting of a bubble in the US housing market. The medium-term direction of the global economy will be set largely by two countries, China and the US, according to Deloitte’s study “ Global Economic Outlook 2008”.

In the past decade, there has been a massive flow of funds from China to the US, since funding America’s external deficit has enabled China to cheaply export its goods and keep millions of workers employed. However, the massive flow of capital from China to the US has had some unanticipated effects as well. US investors started to seek new outlets in order to achieve higher returns. So, in a growing economy with low interest rates, investors looked to property, expecting that the home prices will continually rise. And indeed they rose. Yet, as home prices rose, people started to expect them to rise further. They started to pay prices unrelated to the expected return from renting out the homes. Instead, they paid prices related to their expectation that prices would rise further. This speculative bubble bursted in 2007, starting the global economic processes with unpredictable results.

The important question is how will the turmoil in the US financial market influence the global growth? At the very least, the crisis will have a negative impact on US, which can expect a mild recession. Some countries that depend heavily on exports to the US will suffer accordingly. European growth will probably experience moderate slowdown, and the crisis will not have much impact in Asia. However, since 2006 on, the inflation began to rear its ugly head in many major countries. The inflation was triggered by several different causes: upward pressure on comodity prices, including oil, rapid growth of the money supply, the declining value of the dollar etc. The entry of emerging markets, such as China and India, into the global economy put downward pressure on wages and prices. Yet the process of integrating these giant countries into the global economy will not last forever. Once largely completed, that particular restraing on global inflation will be removed.

The good news from Europe is that the continent is less dependent on stimulus from the US than in the past. Europe’s central banks will have some leeway to lower interest rates without concern about inflation. There is, however, some bad news. First, some European countries are at risk from inflated housing prices. Of particular concern are the UK, Spain, and Ireland. Property price bubbles have supported consumer spending growth, but a reversal of such bubbles could have negative consequences for economic growth. Second, Europe is still quite vulnerable to contagion from US credit market conditions. Third, the rising euro is already having a negative impact on export growth. But longer term, Europe’s enomomic performance will be determined by structural factors. These include regulation of the labor market, taxation policy, competitive policy, subsidies, and the degree of trade restrictions. There appears to be a general consensus among political leaders that policy should move in the direction of liberalization. 

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About Deloitte Bosnia and Herzegovina
In Bosnia and Herzegovina, the services are provided by Deloitte Ltd. Sarajevo and Deloitte Advisory Services Ltd. Sarajevo (jointly referred to as “Deloitte Bosnia and Herzegovina”) which are affiliates of Deloitte Central Europe Holdings Limited. Deloitte Bosnia and Herzegovina is one of the leading professional services organizations in the country providing services in audit, tax, consulting, and financial advisory services through nearly 40 national and expatriate professionals.

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The International Association of Airline Internal Auditors (IAAIA) began in 1991 with several airline internal auditors gathering in London to exchange information on challenges and best practices experienced within their Internal Audit departments. As of 2006, the organization has grown to over 70 member airlines and continues to meet annually across the world to network, exchange ideas and solutions.

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