Chapter 2. Developments in the Global Economy and Financial Markets

Abstract

The course of the global economy in FY2008 was shaped by the interaction of three powerful forces: an escalating financial crisis slowed growth in some of the advanced economies, growth in emerging market and developing economies continued at a brisk pace, and inflationary pressures intensified throughout the world, fueled in part by soaring commodity prices. Overall, global GDP measured at purchasing power parity exchange rates increased by 4.9 percent in 2007—well above trend for the fourth consecutive year (Figure 2.1). From the fourth quarter, however, activity decelerated in the advanced economies, particularly in the United States, where the crisis in the subprime mortgage market affected a broad range of financial markets and institutions. Although growth in emerging market and developing economies also slowed beginning in the fourth quarter of 2007, it remained robust, by historical standards, across all regions.