First-Half Growth in the G7

September 26, 2008

As a result of a downward revision in U.S. GDP growth last quarter to 2.8% at a seasonally adjusted annualized rate (saar) from a previous estimate of 3.3%, economic growth in the first half of 2008 (that is between 4Q07 and 2Q08) amounted to 1.8% saar.  Such a pace represents little change from growth of 2.0% in full-2007, although the composition of growth rotated sharply away from domestic demand and toward net exports.  Net foreign demand accounted for 2.93 percentage points of growth last quarter, for instance, whereas all other components of demand exerted a collective marginal drag.  GDP growth between 2Q07 and 2Q08 of 2.1% was likewise similar to full-2007 growth.

In contrast to the United States, growth elsewhere in the Group of Seven decelerated sharply in the first half of 2008.  Real GDP in the euro area advanced 1.0% saar between 4Q07 and 2Q08, down from an expansion of 2.6% in 2007.  British growth slowed to 0.6% saar in 1H08, A fifth as much as the 3.1% pace of 2007.  Japan and Canada both experienced negative first-half growth of -0.3% saar between 4Q07 and 2Q08, down respectively from positive growth rates in 2007 of 2.0% in Japan and 2.7% in Canada.  The United States finally reaped the stimulus from a prolonged and sharp drop in the dollar dating back to 2002, whereas appreciating currencies and elevated energy costs caught up with other economies.  The United States appears only to have delayed the inevitable downturn, and perhaps that isn’t even true since jobs have contracted each month this year.  The layoff rate is now well above the historical threshold associated with recessions.  The housing market debacle, high inflation, and credit crunch are squeezing business and household spending, and net exports will support growth in the future to a diminishing extent because of weak demand in other economies.  Whatever U.S. government plan is legislated will affect the nature of the recession but not enable such to be averted.  Banks still have too little capital, and the housing market has not hit bottom.



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