decline in the us dollar also works in this direction. the second potential channel is financial contagion, with the possibility that other countries may experience the same financial dynamics as those which have been at work in the united states. my view was that this second channel was likely to be the more important one in this episode. the trade channel certainly is working – lower us demand is being felt in weaker exports to the united states from most parts of the world. but other forces are also at work, and the strength of some other regions has meant that many export - driven economies, certainly those in asia, have continued to record quite solid growth into the early months of 2008. some of these countries have also developed a good deal of momentum in domestic demand. so to date, trade per se has not been the major issue. but financial exposures to the problem assets were spread around the global system. creditrelated losses that have been disclosed by financial institutions around the world to date amount to something approaching us $ 400 billion, of which about half is in institutions domiciled outside the united states. more losses reside in entities outside the core financial system. so the pressure on balance sheets arising from the decline in credit standards in the middle of the current decade has extended beyond the us itself, at least to europe and the uk. given the integrated nature of financial markets in the developed world, moreover, pressure on term borrowing costs for banks has been seen in many places over the past nine months, even if in a less acute way than observed in the countries at the centre of the crisis. these forces are contractionary in nature, and so global growth is widely expected to be lower in 2008 than the very strong result in 2007. according to the imf, global gdp growth will moderate to about 3¾ per cent in 2008 and 2009, with slowing concentrated among the developed economies of north america, europe and japan. this forecast embodies a mild us recession during 2008. but while this outcome for global growth would be well below the exceptional pace of about 5 per cent seen in 2006 and 2007, it is actually in line with the average rate of growth for the world economy over the past 15 years. and although the imf suggested in april that the short - term risks surrounding this forecast were concentrated on the downside, with a 25 per cent chance of global recession ( which it defines to be global growth at or below 3 per cent ), ‘ economic prospects in 2008 : an antipodean http

economy as you well know, the us economy is struggling with a period of weakness at present. growth has slowed to a very subdued pace, and confidence is well down. there continues to be debate as to whether or not what we are witnessing can be called a recession. in some respects, this is a rather silly preoccupation because there is no doubt that conditions are weak, and it is not worth spilling much ink over whether the growth rate is just above or just below zero. that said, the us economy has, thus far, done a little better than many people had feared. of course the episode is not yet over ; a period of adjustment still lies ahead. the epicentre of this adjustment is the housing sector, where deteriorating lending standards and a speculative boom in parts of the country a few years ago led to a build - up of excess physical stock and over - stretched borrowers. subsequently, the need to work off this overhang has seen construction rates for new homes fall by half, and prices for established homes in many major cities decline for the first time in many years. rising defaults and foreclosures are likely to dampen prices further. the non - recourse nature of mortgages in some us states is potentially a destabilising factor as well, since even people who can service a loan have an incentive to walk away once their equity falls to zero. tighter credit conditions are a dampening factor for the us economy more generally, as lenders work to limit risk in order to repair their own balance sheets. so the real question is when the preconditions for a renewed expansion will come into place. it is perhaps a bit soon to conclude that we have reached that point. there are certainly some helpful dynamics at work : the worst fears of a serious financial collapse have abated somewhat over the past couple of months, the process of balance sheet repair for key institutions is well under way, macroeconomic policies have been put into expansionary mode and initiatives to offer some modest support to the housing market are in train. considerable uncertainty, nonetheless, surrounds the outlook for the united states over the next year or so. the global economy what is the effect of this on the rest of the world? in a previous response to this question, 1 i suggested that there are two key channels to consider. the first is trade spillovers, as the fall in us income means that the us demands less in the way of products from other countries. the