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
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
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-à-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