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NEW YORK CITY-Global financial volatility has increased as US subprime woes have spread to the rest of the world; however, Global Insight’s chief economist Nariman Behravesh and economist Sara Johnson say that overall, strong global fundamentals will likely limit the downside from the recent financial crisis. Global Insight estimates that roughly 60% of the US $2-trillion debt in the non-prime mortgage market was securitized. Of this, roughly half was repackaged and sold to investors outside the US mostly in Europe and Asia.

The Global Insight economists’ explain that central banks have been quick to pump emergency liquidity into their respective banking systems. “More injections may be required,” they say. “If growth prospects weaken considerably, many central banks will abandon any further tightening and even begin to loosen policy.”

Global Insight currently expects housing starts to fall to 1.3 million units by early 2008. Given that many low-risk homebuyers are having difficulty getting mortgages; the housing sector is probably going to suffer more. This could reduce growth in late 2007 and early 2008 to below 2%, which means that there is an increasing likelihood that the Fed may need to cut interest rate in late 2007 and/or early 2008, the economists say.

Although European growth has peaked, the economies of the region are likely to be relatively immune to the recent financial turmoil, according to the company. Second-quarter growth in the Eurozone decelerated considerably–to 0.3%–quarter-on-quarter–compared with 0.7% in the first quarter. “We have trimmed our 2007 Eurozone projection from 2.8% to 2.7% and expect growth to slow further to 2.3% next year; however, growth fundamentals remain strong,” they explain. Global Insight now believes that the European Central Bank may hike its rate once more, rather than twice, as previously expected.

The company notes that in the past couple of quarters, Japanese growth has weakened considerably. “The dilemma facing the Bank of Japan is particularly difficult, given weaker growth, global financial events, and the recent unwinding of the yen carry trade, which has pushed up the yen/dollar rate in the past couple of months.”

According to the company, China’s real GDP surged 11.9% year-on-year in the second quarter, up from 11.1% in 2006 and early 2007. There are growing concerns that the government has lost control of the economy and that the current boom could end in a bust. China’s economy is expected to grow 11.5% this year and 11 % in 2008, with a more pronounced slowdown likely in 2009.

Overall, Global Insight economists believe that while the financial turmoil of the past month will reduce world growth a little, growth fundamentals remain strong. They note that much of the real impact of the subprime woes will be concentrated in the US. They also explain that the financial crisis is fairly tame compared with past crises and that growth momentum is still strong in Europe and Asia–outside of Japan. Liquidity growth is robust in Asia and Europe and interest rates are still quite low.

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