Though the subprime mess and rising oil prices slammed the U.S. economy during much of 2007, other emerging markets -- especially China and India -- seem to be on a roll. China's growth rate of more than 11% is likely to continue, and India, too, should be able to sustain a high rate of GDP growth, even if it slows from last year's 9%. Latin America, meanwhile, is cautiously optimistic but could see a moderate decline in 2008. The Knowledge@Wharton Network sites -- including Universia Knowledge@Wharton, China Knowledge@Wharton and India Knowledge@Wharton -- spoke with Wharton faculty and other experts about what to expect during the coming year.
U.S. Economy and Financial Markets: Uncertainty Reigns
How best to describe the outlook for the U.S. economy and financial markets in 2008? Uncertain at best.
High oil prices and fallout from the subprime mortgage debacle continue to threaten the economy and financial markets, according to several Wharton faculty members. Although none think a recession is guaranteed, all agree that even if a recession is averted, economic growth will be agonizingly slow. "There are a lot of unknown unknowns out there," says management professor Marshall W. Meyer.
Perhaps surprisingly, none felt the U.S. presidential campaign will have much effect on the markets. As finance professor Jeremy Siegel put it, none of the candidates save John Edwards has a strongly anti-business platform, and the former North Carolina senator appears less and less likely to become the Democratic nominee. None of the others "are significantly anti-market. The market could live with Hillary or Obama, and of course it could live with any of the Republicans," he notes.
Siegel is more optimistic than many experts, thinking that the U.S. economy will slow during the first half of the year but will avert a recession and start to rebound in the second half. The chief threat, he says, is high oil and food prices, rather than the housing slowdown. "We've adapted pretty well to $3 [per gallon] gasoline, but $4 would be quite difficult," Siegel says.
"Forecasters are split about 50-50 on whether there's going to be a recession or not," he adds. "I think there's some predominance among professionals that there isn't [going to be a recession]. I'm in that optimistic group."
Siegel expects gross domestic product to grow at an annualized rate of 1% to 2% during the first half of the year, and perhaps 3% in the second half. "I'm predicting that we could rise to 3% in the second half of the year because I think that by the middle of this year, housing will hit bottom," he notes, adding that the economy could fall into recession if rising oil and gasoline prices dampen consumer spending.
As for the credit crisis, "Once this subprime crisis is sorted out, it will not be as bad as the market fears," Siegel says, predicting that the number of foreclosures and the losses in mortgage-backed securities will be smaller than many forecasters expect. "There is tremendous fear in the market today about what those losses are," he suggests. He thinks the market has overestimated the number of securities that will default on payments promised to investors.
Siegel did note that the financial markets were jarred by a recent report that unemployment in the U.S. had risen in December to a two-year high of 5%, but he doesn't think the situation will get worse, adding that the number of people with jobs had continued to rise. "The unemployment rate seems very anomalous to me. It's not likely to stay that way next month.... You've got to do some smoothing on that [statistic]. My feeling is it will go down to 4.9% or 4.8% once we get the January data."
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