Tax Cuts to the Middle Class
Wharton finance professor Richard Marston believes the U.S. economy will slow significantly, primarily because of the credit crisis arising from the subprime debacle. He believes Washington should step in with a stimulus package providing tax cuts to the middle class.
"At this point, the economy looks bad enough that it almost doesn't matter whether we satisfy the technical requirements of a recession," he says. "We are in a big slowdown.... Why has this slowdown occurred? The first ingredient is housing, but that alone would not have sunk the economy.... No, we needed the financial disruption that started with subprime loans."
A year ago, Marston warned that the market was underestimating risk, noting that investors were demanding very little extra yield for taking on the risk inherent in junk bonds and emerging-market bonds. Many financial institutions took on too much risk and in recent months they have suffered huge losses as prices have fallen on risky securities like those tied to subprime mortgages. "Add one more ingredient -- an oil price approaching $100 [a barrel] -- and no wonder we are slowing down," Marston says.
He believes the securities markets have not fully accounted for the economic slowdown, suggesting stock prices could fall. "If the slowdown is here, then investors need to take heed," Marston says, predicting that riskier stocks, such as those investing in small companies, are likely to suffer the most.
Cautious Optimism in Latin America and Spain
Latin America's overall growth rate in 2008 will most likely face a moderate decline in 2008, according to economists, who add that their forecasts are the most optimistic for the Southern Cone countries (Argentina, Uruguay, Chile), and the least optimistic for Mexico and the Caribbean.
The region was expected to grow by an average of about 5% in 2007. However, because of the subprime mortgage crisis in the U.S., the expansion rate will be about 4.25%. Mario Ricardo López Ramírez, a professor at the University of Medellín in Colombia, predicts that South America's GDP will come in at 5.6% in 2007, slightly below the 5.8% recorded in 2006. He expects the trend to continue during 2008. This slowdown, he says, "can be explained by the risks associated with the decline in external demand and continued increases in international interest rates."
In Argentina, he adds, the prediction is for "6% growth in 2008, below the 7.5% recorded in 2007, and for 5.5% growth in Chile. He expects growth of 5.5% in Uruguay, 3.5% in Paraguay, 7.3% in Peru, 4% in Bolivia, 3% in Ecuador, 4.3% in Brazil and 5.8% in Colombia. In Venezuela, he projects growth of 7% as a result of large salary increases and high governmental spending. He also forecasts that Mexico and Central America will suffer a drop in their growth rate to 4%, "as a result of a slowdown in external demand related to the behavior of the American economy, as well as to declining domestic demand and restrictive monetary policy."
Despite such mixed forecasts, confidence in the economic progress of the region still exists. "Latin America continues to be in a very favorable economic cycle, which we believe will continue next year," says David Tuesta Cárdenas, a professor at the Catholic Pontifical University in Peru. He ascribes the situation to the structural reforms that began during the 1990s and which improved the competitiveness of the region through such measures as tariff reductions and trade agreements, the arrival of international investors, and the fact that "emerging nations such as China and India continue to lead the way in global growth and are the prime source of demand for [Latin American] raw materials. This situation seems to be continuing despite economic conditions on the global level."
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