All told, we have become slightly more cautious about the US economic outlook than to date. On average the US economy is likely to grow by 2.2 %, around half a percentage point lower than previously expected. If mortgage rates rise further – which looks increasingly likely with regard to risk premiums – a further drop in residential housing demand stateside is inevitable. This is also likely to result in a drop in house prices – we see a fall of almost 5 % next year. Via the wealth effect this is also likely to put a damper on consumption. The further slowdown in the US will knock a quarter of a percentage point off world economic growth and around half a percentage point off world trade growth. However, the impact on Germany’s exports and those of other European countries will be slight. All of this suggests that the impact on European GDP growth will be 0.1 percentage points at most.
Impact of US real estate crisis and financial market turbulence on the economy
European real estate markets could be more severely hit. In Spain in particular the rise in house prices has already ground to a halt this year. As a result, Spain, but also a number of other European countries, could experience a sharper slowdown in consumption and residential housing construction than expected. We now expect to see economic growth of 2 ½ % in Spain in 2008 – 0.5 percentage points down on our previous estimate.
Households are unlikely to perceive the stock market slides in Europe as a blow to their wealth situation and will not therefore rein in consumption demand. Stock markets in Europe have so far seen a correction of only around 10 % compared with their highs and most are still above the level at the start of the year. The economic impact of what is likely to be only a marginal rise in borrowing costs is also likely to be low – particularly as the financial situation of many companies is significantly better than it was a few years ago. As things stand, the danger that the confidence crisis on the financial markets will spawn a general credit crunch for companies in Europe is relatively small.