After four years of average annual global GDP growth of better than 4 1/2 percent, global growth will slow to 3.8 percent (year over year) in 2008 and 4 percent in 2009. Growth is slowing in major industrial countries, with the US economy on the verge of, and perhaps already in, outright recession. A mild US recession will have a modest negative effect on real GDP growth, but Mexico and Canada will suffer the most from spillover effects. Other industrial countries will experience less of a slowdown, while most emerging-market economies are likely to maintain quite strong, though somewhat slower, growth. China’s economy continues to surge forward, with growth likely to slow from 11 1/2 percent in 2007 to about 10 percent in 2008 and 2009. 

A key feature and source of uncertainty in the present economic situation is the continuing turmoil in financial markets, especially in the United States but with spillovers to Europe, Japan, and emerging markets. The turmoil has been most severe in US financial markets and institutions, and most of the problems faced by non-US institutions have arisen because of their involvement with financial instruments originating in the United States. The Federal Reserve recently took extraordinary actions to extend specific liquidity support to a wide range of US financial institutions. Given this massive easing and the likelihood of further modest easing, the US economy now needs to undergo at least a near recession if the Federal Reserve’s easing is not to be excessive. Deep reforms of the financial system, including the Federal Reserve’s policies and practices, are clearly needed to reduce the likelihood of such turmoil in the future. Courtesy of Michael Mussa, Peterson Institute for International Economics http://www.petersoninstitute.org