The graph above may bring a bit of nostalgia to those of us that were arcade game buffs back in the 80's but I can assure you this is no sequel to "Tempest". Although blasting vector graphic drawn aliens was a lot of fun at the time, it is also a far cry from today's multi core powered lifelike 3D shading technology.Getting back to serious stuff, the "radar" (yes, that is what it is known as) graph is a neat way of presenting our global economy expectations for 2008. So what are we saying? Well, we think that there is a strong likelihood of a slowdown (I didn't say a recession!!!) in growth across the globe led by a U.S. downturn (itself a result of the ongoing housing recession and credit crisis).
Our rational is as follows: U.S. consumers are being hit by wealth erosion, on the one end by a steadily shrinking value of their homes and stock market losses and, on the other hand a sharp rise in oil prices making such things as gasoline prices and airline tickets more expensive. We could argue that a quick fix would involve borrowing more (after all, that is what has been powering the recent consumer led expansion in the U.S. and in many other countries). Problem is that lenders are no longer as willing to lend as they did in the past so money is becoming hard to get by (and this goes for businesses too).
We could also argue (like some do) that a marked slowdown in growth would ease the pressure on oil prices, giving the Fed more flexibility with its accommodative policy. Maybe so a decade ago but things have changed dramatically since. The U.S. is having a smaller impact on oil prices mainly because the majority of growth in demand has been coming from China and India (and the consumption levels still remain far below that of developed countries). Combine this with ongoing geopolitical turmoil (most recently with Pakistan) and supply side issues and lower oil prices quickly becomes wishful thinking.
To summarize, the Fed (and many other central banks for that matter) are going to have a tough year ahead but they certainly won't be the only ones who will be navigating in rough waters.
