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Eight Fallible Predictions for 2008

Omkar Goswami


We are still in the silly season. Work load are not at the peak; people are mistakenly writing 2007 on cheques; the bonhomie and gastronomic excesses between pre-Christmas and New Year remain in the air. As most of us are getting settling in to 2008, here are eight predictions that can go completely wrong by the end of the year.

Prediction 1: The US economy will considerably slowdown in 2008, with US GDP growth for 2008 hovering around 1.5 per cent, give and take a bit. The construction of private housing units (or ‘housing starts’) is a robust index of US economic growth. The numbers don’t look good at all. New housing starts in November 2007 were 24 per cent below what they were a year earlier; and 48 per cent lower than the peak in January 2006. Despite some pick-up in October and November 2007, retail sales growth has been consistently lower on a monthly basis compared to 2006. Most ominous is the US non-farm unemployment rate. It has been creeping up and is now at 5 per cent — the worst since November 2005. Be prepared, then, for a much more sluggish US economy.

Prediction 2: The Euro Zone and Great Britain will also see a slowdown in 2008. The Euro Zone is expected to have grown by 2.6 per cent in 2007 — itself 0.4 percentage points below the 2006 growth. For 2008, the growth will be more like 1.6-1.8 per cent. British GDP growth will also reduce from 3 per cent in 2007 to under 2 per cent in 2008. As in the US, almost every real sector indicator is pointing to a slowdown.

Prediction 3: We will continue to hear the word ‘sub-prime’ throughout 2008. Everyone agrees that there is a great deal more to unravel. The only difference lies is what does “great deal more” mean? Another $100 billion in write-offs is everybody’s lower-bound estimate. But where will it stop? Another $150 billion? $200 billion? Or more? For every $1 billion written off, capital adequacy will reduce fund availability by $10-$12 billion. Besides, each dose of bad news will erode market confidence, and gum up the financial system. Arguably, there will be a price at which investors will buy bargain basement mortgage backed paper and collateralised debt obligations. But before that, there could be a flight to safety — in favour of government securities and commodities.

Prediction 4: The US dollar will weaken further. If I knew by how much, I would be sunbathing on my own Caribbean island. But here are the facts. On 3 Jan 2006, the US dollar equalled 0.83 euros. By 2 Jan 2007, it was 0.75 euros. On 7 Jan 2008, it was 0.68 euros. Here’s what I have been sharing with my friends in industry. Do your budgets for 2008-09 based on an exchange rate of at least Rs.38 to the USD — preferably Rs.37.50.

Prediction 5: Crude oil is unlikely to go below $85 a barrel on a sustained basis. Three reasons. First, there are no signs of a major slowdown in oil demand. Even with US, Euro Zone and Britain’s growth coming down, big oil guzzlers like China and India will still grow reasonably well. So while demand may reduce a bit, there won’t be any sharp drop. Second, there will be no major increase in refining capacities in 2008. And third, for all its dissensions, OPEC will hold the line at around $85 a barrel.

Prediction 6: This may be a year of big commodity plays. As the sub-prime unfolds and US, Euro Zone and Britain face their slowdown, investors will continue punting big on commodities. As I write, gold is at $872.90 per troy ounce, or Rs.34,211 in Mumbai. I expect harder prices for other key commodities as well: precious metals, aluminium, copper, lead, tin and zinc.

Prediction 7: China will not revalue the renminbi. It will just crawl up the currency vis--vis the US dollar by 3.5-4.5 per cent over the year, as it did in 2006 and 2007. The US and the EU can say what it wants. China isn’t revaluing in any hurry. Certainly not in 2008.

Prediction 8: India’s growth will come down to around 8 per cent. Industry growing at 8 per cent, services at 10 per cent and agriculture at 3 per cent gets us to 8.2 per cent GDP growth. That’s probably where we will be.

Refer to this article if I’m right for five of the eight. Otherwise, remember, all economists are profoundly fallible. Enjoy 2008.

Published: Business World, January 2008
 

 

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