>Intersection of Economy & Credit (WACHOVIA)

I. “What is the current state of the global economy?” Global economic growth averaged nearly five percent per annum from 2004 to 2007, the strongest four-year period of growth in decades (Figure

1). However, real GDP growth rates slowed in most countries in the first half of 2008, and it appears that many major economies have now slipped into recession due in part to the effects of the global credit crunch. Industrial production in the OECD has dropped off sharply (Figure 2). Economic growth in the developing world has also slowed this year.

Recession continues to be the theme for the U.S. economy as well. Coincident indicators such as employment and industrial production have fallen steeply since last autumn, and the unemployment rate has moved up over eight percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit.

Moreover, foreign demand for U.S. goods and services has slumped over the last six months as our major trading partners have fallen into recession, and our estimates of global growth have turned negative for the first time since records began (Figure 1 – forecast in green).1 In all, U.S. real gross domestic product declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first part of this year. As for inflation, the substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures around the world. Indeed, overall consumer price inflation compared to a year ago is flat. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly. In our view, the economic slowdown was driven by the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions and consumer & business confidence around the world. The immediate trigger of the crisis was the end of housing boom in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved to be a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions.

To see full report: INTERSECTION OF ECONOMY