International Environment

Despite financial market turbulence in the developed world, the global economy grew 3.7 percent in 2007—almost the same pace as the previous year. In the United States, growth fell 0.7 percentage points to just above 2 percent, and in the Eurozone it slipped from 3 percent in 2006 to 2.9 percent in 2007. Nonetheless, growth in emerging economies as a whole remained vigorous at just under 7 percent. China and India were in the lead, with estimated growth of 11.4 percent and 8.5 percent, respectively (see Figure 1• Gross Domestic Product Growth).

There was a more marked slowdown in the volume of global trade, with growth rates declining from nearly 9 percent in 2006 to just 6.6 percent in 2007. However, because the price of oil and other commodities continued their upward trend, the value of global trade still mushroomed. Oil prices, which averaged $64 a barrel in 2006, spiked to nearly $100 a barrel toward the end of 2007. Food prices were also on the rise throughout the year. In contrast, metals showed a clearly downward trend beginning in midyear (see Figure 2 • Commodity Prices, 2004-2007).

Through July, international financial markets maintained the favorable conditions seen in previous years. Spreads (over interest rates for United States Treasury bonds) for sovereign debt instruments in emerging economies were only 189 basis points in July—just before the U.S. mortgage market crisis. Through mid-August, global financial market turbulence was reflected in sharp increases in spreads, which rose nearly 260 basis points for emerging countries. These trends later partially reversed course. Although substantial, their impact on emerging economies was considerably less than that of the 1997 Asian crisis or 1998 Russian crisis.

The mortgage crisis had a greater impact on subprime markets in the United States than on the developing world as a whole or on the Latin American markets. The rapid response by the Federal Reserve and central banks in other developed countries in providing the markets with liquidity at critical moments was decisive in mitigating the impact on emerging economies.