World economies will grow as U.S. slows

By MALCOLM FOSTER, AP Business Writer 2 hours, 31 minutes ago

A slowdown in the U.S. economy will likely drag on global growth next year, economists predict, but Asia and Europe are expected to remain fairly resilient amid signs of healthy consumer demand.

Even as a cooling U.S. housing market weakens Americans' appetites for foreign-made electronics, clothing and other exports, the swelling ranks of middle-class consumers in China, India and the rest of emerging Asia are seen picking up the slack, experts say.

Europe's growth may also slow some, but the outlook there is also relatively positive due to renewed consumption and falling unemployment.

"While the world's other major economies will be affected by slower U.S. growth, their own domestic demand should continue to drive global growth," Swiss investment bank UBS said in its year-end outlook for the global economy.

Global growth as a whole is projected to slow a tad to 4.9 percent next year from an estimated 5.1 percent this year, the International Monetary Fund predicts.

The world's richer, more mature economies will see lower growth rates. The Organization for Economic Cooperation and Development has trimmed its 2007 growth forecast for its 30 mainly industrialized member countries to 2.5 percent — the lowest rate since 2003 — from its previous estimate of 2.9 percent.

The big question is whether the U.S. economy will slow gradually while avoiding a jump in inflation — something economists call a "soft landing" — or slide into a recession, which could seriously stifle global growth.

"We think it will be a soft landing," said Dong Tao, chief regional economist at Credit Suisse in Hong Kong. And as U.S. export demand slows, "Asia's growth will be more moderate."

"But the rest of the world is starting to pick up the slack," he said. "That will make domestic demand determine the winners and losers."

Consumers in the U.S. and around the world should get some relief from soaring oil prices, which have dropped more than 20 percent since hitting a record high $78 a barrel in July.

U.S. gross domestic product will likely expand by 2.5 percent in 2007, down from an expected 3.3 percent this year, according to according to a panel of 50 top forecasters in a survey released in November by the National Association for Business Economics.

India and China will remain star performers in the year ahead, although both countries face challenges ranging from environmental degradation to the risk of overheating.

China's booming economy is expected to keep growing at more than 10 percent a year. But Beijing faces a tricky balancing act of fostering growth to lift millions out of poverty while trying to clamp down on excessive investment in property development that authorities worry could make banks and companies vulnerable to a financial crisis.

Attempts to restrain investment — two interest rate hikes and measures to curb lending — have had only limited impact.

Chinese officials recently set an 8 percent growth target for 2007, well below the 10.7 percent rate recorded for the first nine months of this year. But growth has topped the targets every year in this decade.

In India, Prime Minister Manmohan Singh has set an ambitious 9 percent annual growth target for the economy over the next five years, up from the current expansion rate of 8 percent, hoping to reduce poverty among the country's 400 million rural poor, who haven't benefited from the country's rapid development.

Singh says boosting productivity in agriculture and channeling more investment into infrastructure projects and job creation are the keys to accelerating growth.

Japan, Asia's largest economy, is steadily recovering from a decade of stagnation. However, consumer spending appears to be weakening, leaving the economy vulnerable to slowing demand for exports, its traditional source of growth.

A critical factor will be when the Bank of Japan next raises interest rates. A move is expected in early 2007. The central bank raised rates in 2006 for the first time in six years to 0.25 percent from virtually zero. Some worry that hiking rates again too soon will choke the recovery.

European growth appears to be on an upswing, but that could be dented some by the expected U.S. slowdown.

Forecasts by the European Union and European Central Bank see gross domestic product in the 12-nation euro zone expanding 2 percent next year, slower than the 2.7 percent expected this year, but well above the 1.4 percent it has averaged since 2001.

"The euro zone can actually cope with a temporary downturn in the U.S. if activity stays dynamic in emerging markets — which seems to be the case for the time being," said Gilles Moec, a London-based economist with Bank of America.

Central and Eastern Europe, combined with Asia, have contributed twice as much as the United States to euro-zone export growth over the past seven years, according to Bank of America.

The only major drag for Europe appears to be Germany, which is expected to take a hit in the first quarter after a hike in its value-added tax.

Latin American economies are expected to do well next year. The region is a big exporter of commodities such as copper, iron ore and soy, so any global economic shocks — like an unexpected slump in China — would have severe repercussions.

Brazil's growth is seen accelerating to 3.4 percent next year after an estimated 3 percent this year. President Luiz Inacio Lula da Silva has managed to bring inflation down to 3.2 percent, something almost unthinkable just a few years ago.

Mexico is expected to grow 3.7 percent next year, down from 4.7 percent this year. But inflation has dropped to a record low, the nation's currency is stable and nearly 1 million jobs have been created in the nation's formal sector.

Argentina is expected to continue its strong comeback after its economic meltdown in 2002, with experts predicting GDP growth of 7 percent next year. Construction is booming, soy exports are up, and unemployment is below 10 percent after reaching a record-high of 21.5 percent in 2003.

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AP Business Writers Elaine Kurtenbach in Shanghai, Rajesh Mahapatra in New Delhi, Hans Greimel in Tokyo, Matt Moore in Frankfurt, Viorel Urma in New York and Alan Clendenning in Sao Paulo contributed to this report.