With the US slowing to the point of recession, what’s the outlook for the rest of the world?

We in Australia still face the prospect of a rate hike if inflation rises in the December quarter Consumer Price Index figures next week. We will also have other figures out next week that will confirm the economy is ticking over solidly. The RBA meets on February 5.

Despite the 12.4% plus fall in the stockmarket from its peak in November (a thousand points up to yesterday) we in Australia are not yet a basket case, like the US and several other major economies around the world.

There is a common factor that unites many of these poorly performing or sliding economies: property, especially collapsing house price bubbles, with commercial and other non-residential property following.

That remains the big question for Australia: our bubble was pricked around 2003-2005 as the likes of the unlamented Henry Kaye and other spruikers went out of business. That’s still being felt in Sydney’s south west where property values fell last year. Employment remains strong, as we saw with the December jobs figures. House prices are on the rise, up 10% or more nationally last year. But, for how long?

So much for Australia, what about other key economies around the world …

SPAIN: There’s a race on between the looming national election in March and the country’s imploding economy which looks set to suffer a housing bust of US proportions.

The Government of Prime Minister José Luis Rodríguez Zapatero, is upbeat in a an old fashioned way about how growth is slowing from 3.7%, but not by much, to 3.3% to 3.3%, but the housing industry is collapsing with three major construction of development groups  going bust in the past eight months.

The Prime Minister boasts that his country has overtaken Italy and is eyeing France. The reality is that he and his Socialist Government will be mugged by reality as the number of homes and apartments built each year tumbles from around 800,000 to 450,000 at best.

The trouble is that 800,000 homes a year was the combined total of homes built in Britain, France, Germany. As it slows 400,000 jobs will be lost.

People are walking away from homes and apartments even before they have finished buying them because property prices have fallen so far they have negative equity. Sound familiar? It’s what has happened in the UK (and looks like happening again) and it’s what is happening in the US as the subprime mess worsens.

Inflation is running at a 10 year of 4.3%, growth is slowing, unemployment is rising and the banking system is under increasing strain. The interest is what breaks first: with the elections two months away the betting is that the Government will go first.

A recent column in the Fin Times in London was headlined “Spain’s house of cards has started tumbling down.” House prices have risen 280% over the past decade, and are now down 20% and more in some places.

Spanish banks are well reserved but property and housing non-performing loans are up 48 in the past year.

BRITAIN: House prices are also easing, but at a rate that would make a Spaniard nostalgic. The Royal Institution of Chartered Surveyors UK says December was the worst month for the housing market since the aftermath of Britain’s last recession in 1992.

It said the number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 49.1 percentage points compared with 40.6 points the previous month. The ending of Britain’s decade-long housing boom is threatening economic growth. Falling home values are crimping retail spending with the giant Tesco reporting less than anticipated growth in December, Marks and Spencer reporting a decline in sales in the same month, and several other big chains warning of lower profits and sales this year.

The Bank of England is expected to cut the benchmark interest rate for a second time next month after December’s cut, even though inflation at all levels remains high. In fact Britain’s poor retailing climate mirrors that in Euroland where retail sales fell half a per cent in November. Britain, like most other countries, is experiencing food price inflation.

UK economic growth is forecast to slow to about 2% from about 3% in 2007. Britain’s has a budget deficit of 3% of GDP and current deficit nearing 5.7% GDP in the last quarter. (Well, Australia has a similar current account deficit of similar proportions, but a budget surplus).

Britain of course has the $US50 billion-plus embarrassment called Northern Rock to deal with. That is symptomatic of the problems confronting the country’s housing, banking and wider economies this year. During a holiday in Europe at Christmas I saw a TV ad for the mortgage bank, Alliance and Leicester. It was offering to pay 12% for a year for new deposits (with some rules) compared to 8.4% for HSBC. Remember the old adage, the higher the reward, the higher the risk. Another online bank was offering 100 pounds to sign up, with a certain size of deposit, and would pay you another 100 pounds if you decide to leave at the end of a year. Madness. The British Government will shortly be forced to nationalise Northern Rock. What a joke!

CHINA: In still booming but slowing China the Government has ordered banks to set aside larger reserves and imposed price curbs on grain, meat and eggs to try to prevent inflation at an 11-year high from triggering civil unrest.

Lenders must now put 15% of their deposits with the central bank from January 25, the central bank, the People’s Bank of China said yesterday. That’s up from 14.5% and is the highest for 20 years.

The increase in the reserve requirement is the 11th since January last year. The country’s National Development and Reform Commission today said makers and sellers of some foods, cooking oil and liquefied petroleum gas must seek government approval for price increases.

Inflation is running at 6.9%, the country’s trade surplus totalled $US262 billion in 2007, even though exports slowed on the last quarter, and economic growth will have run at around 11.5% when the figures are released later this month.

The Government says it wants to slow growth to 8% this year and inflation to 4.9%. Much of that will happen in the second half after the end of the Olympic Games.

But the Chinese Government has an official policy of running a ‘tighter’ monetary and economic policy this year designed to slow activity, especially prices.

Inflation is the big threat to the much sought after ‘social harmony’ which is another way of saying that the Communist party doesn’t sees food price inflation and shortages of things like cooking oil as threatening its hold on the country.

GERMANY: It  used to be called ‘the sick man of Europe, especially in the years after the merging of the old East Germany into the more prosperous West. But like so many other countries in Europe, it has been cutting the state’s share to where it will fall below that of Britain for the first time since the Margaret Thatcher years.

Chancellor Angela Merkel’s government has balanced the German budget, a feat last achieved in 1970 but the real story is colossal trade surplus of $US330 billion in 2007, retaining its slot as the world’s number one exporter ahead of China. But business confidence has taken a battering as the credit crunch has hit German banks, forcing two small ones to be bailed out, and damaged some bigger institutions. The trade unions are looking to push for 6% plus wage rises.

Economic growth was 2.5% last year, down from 2.9% the year before and thanks to those strong exports, which rose 8%. Those exports accounted for half the growth in GDP.

But a downbeat survey of investor confidence pointed to clouds on the horizon for Europe’s biggest economy. A survey of investor confidence released this week showed they were much more pessimistic about 2008 than they were in December.

Chancellor Merkel said on Tuesday that the country’s economic growth will probably slow this year due to domestic inflation pressures and the impact of the US subprime mortgage crisis. The official forecast is for GDP to grow by 2% (down on the 2007 and 2006 figures) but she told media in Berlin that Germany should be prepared for “weaker economic growth” in the coming year.

Germany’s tough exporters seem to be far better placed to ride out the strong euro than anyone else in the eurozone.

FRANCE: There’s a rising tide of moans and groans about the high euro. They are matching the publicity for the love life of President Nicolas Sarkozy High oil prices and a misfiring economy and rising social tensions in the slums of Paris, are not making for the best of times for the country.

The French economy grew by around 1.5% over the first three quarters of 2007, but with inflation at 2% and rising and exports weak (Airbus is struggling with production problems) economic growth will be less than 2% this year and lower than the government’s forecast of 2.0% to 2.5%, according to the statistics body INSEE.

The trade deficit is growing. Taxes remain high, the 35 hour week is a concern to business and tax cuts introduced last year by the new Government have played some part in keeping growth ticking over, but industrial disputes over changes to pensions and other public service perks have disrupted confidence.

The OECD sees French growth falling under 2% this year as well.

The West German Chancellor has rejected French calls to do ‘something’ about the stronger euro which is close to a historic $US1.50 high.

ITALY: The third major economy in the Eurozone (despite what Spain might think) is slowing dramatically with the Bank of Italy this week revealing a sharp cut in expected 2008 growth. That is now estimated at around 1% from the previous estimate of 1.7%. The central bank blamed the high euro, rising energy costs and higher food prices. Parts of Italy engaged in a ‘pasta strike’ last year after some producers lifted the price of the country’s principal carbohydrate because of rising wheat prices.

This cut will reduce the Euro area’s expected 2008 growth to less than 2% and add to the pressure on the ECB which last week left interest rates unchanged and even warned of a possible rise in wage rises started exceeding inflation. That was aimed at Germany and France.

JAPAN: According to US investment bank, Goldman Sachs, the world’s second biggest economy is on the brink of sliding back into recession after a long, near five year expansion that saw the growth rate hardly tick above 2% in any year. Goldman said last week there was a 50% chance Japan could tip into recession. Deflation remains a concern, as does inflation in some areas. Real wages are still falling, the country’s budget deficit isn’t shrinking but its trade surplus continues to grow.

Business confidence isn’t strong and ye value of the yen is being driven by the on-off nature of the carry trade where investors borrow in yen at 0.5% to 1% a year to get bigger returns offshore. The stockmarket hit a two year low yesterday as Japanese investors fretted that the country’s strongly performing exporters would be hit by the slowdown in the US. Japan is exporting more and more to China, but the US remains a vital market for car makers, consumer electronic, steel makers and manufacturers of chemicals, machine tools and other industrial products.

Goldman’s chief Japanese economist said late last week “We estimate the probability of a recession in Japan has risen to the ‘danger level’.” Tetsufumi Yamakawa said in a report to clients that “We project weaker-than-expected growth in Japan, especially in the first half of 2008, owing to an inevitable, moderate slowdown among emerging economies.”

Goldman said last week that the US economy was falling into recession.(the firm had said in late November there was a 40%-45% of that happening, now it says it is a reality).

That will have a big impact on Japanese economic growth.

Sluggish spending by Japanese consumers has left the country more dependent on export markets which are being affected by the housing slump and subprime induced credit crunch. Japanese banks and investors have been ensnared in the credit crunch in the US, but not to the extent US banks have. Japanese banks have been hit by a finance company lending scandal that is costing them billions of dollars, while the housing industry has slowed sharply because of changes to issuing permits and other administrative issues.

IRELAND: This economy  is held out in Australia as the sort of low tax high growth model we should be aiming for. But housing is sliding further into the red suffering its biggest fall last year in 20 years. Inflation at 2.9% is about equal to ours, but above the eurozone average of around 2.2%. Unemployment is edging higher. The stockmarket fell more than 30% last year.

The fiscal position of the government has worsened with a deficit is expected by 2009 and GDP is tipped to slow sharply this year mainly due to the impact of the slowdown in the previously overheated property sector. There is a real risk of recession.

The latest Quarterly Economic Commentary by Ireland’s Economic and Social Research Institute (ESRI) and published last month said growth in the Irish economy this year is forecast to be slower than in any year since 1992.

As a result, virtually no change is anticipated in the number of people with jobs this year while unemployment is projected to rise to 130,000, its highest level for a decade.

The ESRI restated its belief that, when final data is available, average house prices in December 2007 will be shown to be 15% lower than a year earlier.