10 economic predictions for 2007 from Global Insight

With 3 affecting the U.S. home market for 2007.

1. SLUGGISH GROWTH FOR THE UNITED STATES.

The American economy will only grow about 2.2% next year. The downturn in housing is turning out to be quite pronounced and is beginning to have a measurable impact on consumer and capital spending. But the good news is that thanks to strong fundamentals for consumer spending (decent job growth and improving real wages, helped by lower gasoline prices), capital spending (strong profits and still-high capacity utilization rates), and exports (a weaker dollar and strong growth overseas), slowing growth is unlikely to develop into anything worse.

7. HOUSING WILL KEEP DAMPENING U.S. GROWTH, AND COULD BECOME A THREAT ELSEWHERE.

The U.S. housing crunch has already cut GDP growth by more than 1.0 percentage point in the second half of this year.It will remain a drag on growth throughout much of 2007, although with diminishing impact as the year progresses. As global growth decelerates, other economies with booming housing markets (i.e., Ireland, the United Kingdom, Spain, and Australia) may also experience a crunch. Both the British and Australian housing markets suffered through a mild correction a couple of years ago, but have since rebounded. In a weak growth environment, though, strong house price appreciation is unlikely to be sustained anywhere.

10. NO RECESSION WITHOUT MUCH HIGHER OIL PRICES, INFLATION, AND INTEREST RATES.

Even if the housing market deteriorates further in the United States, and turns down in other developed economies, this is unlikely to trigger recessions, given the low inflation and interest-rate environment in the world economy today. Nevertheless, this picture would look a lot bleaker if (because of a major supply disruption) oil prices were to climb dramatically again, pushing up inflation and interest rates around the globe. The combination of a deeper housing recession and higher inflation and interest rates (and a disruption in oil supplies) would probably be enough to push the U.S. and world economies into a recession. Fortunately, the probability of such a scenario is still relatively low””only between 20% and 25%.