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Sunday, November 4, 2007

Financial crisis may lead to unexpected changes in the global economy

LONDON- The crisis plaguing the financial market could lead to some unexpected changes in the shape of the global economy, according to Roger Bootle, economic adviser to accountants Deloitte.
The effects of the crisis are likely to be seen in a re-pricing of risk, lower appetite for lending and borrowing, slower economic growth, interest rate cuts and a significant fall in the dollar, he said.
While most of these are already starting to be seen, Bootle predicts even wider implications.
"The end result could be an increase in the political pressure on countries such as China to alter their exchange rate policies. The upshot is that the financial crisis may trigger events that lead to unprecedented changes in the shape and dynamics of the world economy," he said.
The financial crisis was sparked by the fallout in the US sub-prime market, but its origins run deeper. The seeds of the crisis were sown by two developments that occurred years before -- namely the sustained period of ultra-low global interest rates in the early 2000's and an excessive appetite for risk, he added.
As the risk element becomes better balanced, the heady-returns generated by some asset classes in recent years may be a lot harder to find in the years to come, even if the world economy were to remain strong.
Bootle sees the US economy taking a hit, with GDP growth likely to slow to just 1.7 pct next year and US interest rates falling to 4.25 pct. The euro-zone and the UK are not expected to escape unscathed. Economic growth in the euro-zone is set to slow from 2.7 pct this year to about 2.2 pct next year. Meanwhile, the UK is seen experiencing a slowdown in growth from 3 pct to about 2 pct, prompting interest rates to fall to 5 pct by the end of next year, said Bootle.
"This combination of events is likely to result in a significant fall in the dollar. This will increase the political pressure on the super-saving nations, such as China, to alter their exchange rate policies and to boost domestic spending," he added.

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