Fear of Stating the Obvious ...
But still, let us summarize the situation just quickly for those still looking into 2007 with any kind of optimism.
The European Commission said the economy of the dozen euro nations may not grow at all in the first quarter of next year amid higher interest rates and a slowdown in the U.S.
The forecast of stagnation is the bottom end of the commission's range of between zero and 0.5 percent growth for the first three months of 2007, which is down from an August estimate of between 0.2 percent and 0.8 percent. The European Union's executive arm also lowered its prediction for growth in the current quarter to about 0.5 percent.
The European Central Bank has raised interest rates five times since early December and today economists surveyed by Bloomberg News cut their predictions for U.S. growth. In Germany, the region's biggest economy, the government will raise sales taxes next year, threatening consumer spending.
The commission previously projected growth of about 0.7 percent for both the third and fourth quarters. If the economy does stall early next year, it would be the first time since the second quarter of 2003, when it shrank 0.1 percent.
German Chancellor Angela Merkel will increase a value-added tax to 19 percent from 16 percent in January, leading to predictions that consumer spending will stumble.
Business investment in the euro area rose 2.1 percent in the second quarter, more than double the rate of the previous three months, the EU's statistics office in Luxembourg said today. That offset a slowing in consumer-spending growth to 0.3 percent from 0.7 percent, and a tumble in export growth to 1.2 percent from 3.6 percent in the first quarter.
Economic growth is already stumbling overseas, limiting the market for European exports, which is also being threatened by the euro's 6 percent gain this year against the dollar. The euro was at 1.2550 to the dollar today, down from its June peak of 1.2963.
A housing slump in the U.S. is prompting economists to trim their growth forecasts for the second half of this year. The U.S., the world's largest economy, is expected to grow at an annual rate of 2.5 percent in the current quarter, the same pace as in the prior three months, according a Bloomberg News forecast of economists. Both estimates are down from the prior month's survey and less than the 2.6 percent growth rate in the second quarter.
Moving on to the US we also the see the drawings of a recession and/or slowdown in the making. As stated often before by many commentators, the housing market is the key driver here.
The U.S. housing slump will weaken the economy more than previously forecast, prompting the Federal Reserve to reduce interest rates by June, a Bloomberg News survey showed.
The economy grew at an annual rate of 2.5 percent last quarter and will maintain that pace in the final three months of the year, according to the median forecast of 82 economists surveyed from Oct. 2 through Oct. 10. Both estimates are down from the previous month's survey and less than the 2.6 percent rate in the second quarter reported by the Commerce Department.
``The drag from housing is the key reason why everyone's growth forecasts are coming down,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.
Recession or slowdown; a question of semantics?
For all of 2007, the economy will probably grow 2.6 percent after expanding 3.3 percent this year. It would be the weakest performance since 2003, when the economy was starting to regain momentum following the 2001 recession.
Europe's economy is also cooling. The European Commission said today that the economy of the dozen euro nations may not grow at all in the first quarter, in part because of the slowdown in the U.S.
Fed policy makers, who have left the target rate for overnight loans between banks at 5.25 percent since June 29, are betting that slowing growth and a decline in energy prices will reduce inflation. The policy-making Federal Open Market Committee next meets Oct. 24-25.
Fed officials will probably reduce the rate target to 5 percent in the April-June period and by another quarter point in the following three months, the survey showed. The rate cut would be the first since June 2003.
``After a while, you just don't fight the tape,'' said Gary Schlossberg, a senior economist at Wells Capital Management in San Francisco, who previously projected the fed funds rate would peak at 6 percent and now forecasts a reduction. ``A lot of little things are coming together to drive growth down to a point where the Fed feels comfortable bringing rates down.''
It should be pretty clear now what is happening and as such the forecasts for the first quarters in 2007 are already old news. What we need to discuss now is the nature of the slowdown and how large and prolonged the impact will be. Will the economies recover swiftly or are we in for another scenario?