Euler Hermes Economic Research

Editorial

2008 – the year of living dangerously
“With the end of summer 2008, storms are battering world stockmarkets like the hurricanes lashing the coasts of America. After the US Treasury rescue of FannyMae and FreddieMac, and especially after the grant of Chapter 11 protection to investment bank Lehman Brothers – founded 160 years ago – all the facts that seemed to slightly ease concerns over the summer are now forgotten, and 2008 is now well and truly the year of living dangerously on the financial and economic front. Admittedly, commodity prices, and in particular oil prices, have started to ease, but, for themoment, they continue to fluctuate around levels never seen prior to 2008. Also admittedly, the US situation has seemed more favourable,with growth of 1% in the second quarter of the year, but this upturn is explained in very large part by export price competitiveness gains related to the fall in the dollar against all other currencies. Over the whole of 2008, more than three quarters of US growth will come from the contribution of foreign trade, and it will be impossible for the world’s leading economy to repeat this performance next year.

At the same time, the spreads applied on lending to businesses (i.e., the premium over government bond rates that large companies must pay in order to raise finance on the markets) have not stopped increasing, demonstrating the genuine blockage in investment finance, affecting even very large global businesses. And at the beginning of September, the bankruptcies on the part of financial institutions in the US and of major world industrial or services companies have shown, rather, that the worst is yet to come. The euro zone outlook is now a cause of increased concern following its results for the second quarter, during which overall domestic demand in the zone contracted. The European economies have thus moved into tune with the US crisis since spring, and the preliminary figures for the summer period suggest that this situation is not improving. The economic crisis will continue to spread on both sides of the Atlantic over the course of the autumn, first in the construction sector, also via the financial crisis in credit markets, which undoubtedly has yet to claim all its victims, and lastly with the crisis in consumption, durably traumatised by the explosion in prices of some weeks back.

In this context, the economic policy responses planned by various OECD countries offer food for thought: it is during the autumn that most governments complete their budgets for the following year, and wherever they can – that is wherever budgetary lee way resulting from good management in previous years permits – governments have opted for recovery policies. It is noted that the United States, Spain, the United Kingdom, and undoubtedly Germany, are all ready to inject not inconsiderable sums into their economies in order to avoid recession. What do these four countries have in common? They all returned to a balanced budget in the course of the last four years. By contrast, France and Italy find themselves blocked: with their public finances mired in debt that kept rising even during the years of economic growth since 2003, both countries are bound hand and foot in the face of the economic downturn and the upheaval in the financial markets.


Karine Berger

Source: Euler Hermes Economic Outlook, Autumn 2008