The decoupling of economic performance between the U.S. and much of the rest of the world continues. As growth in the U.S. remains tepid early in 2008, output in much of the rest of the world—particularly in developing economies—is forecast to slow only slightly, racing ahead of expansion in the EU and U.S. Revised estimates of first quarter economic output in the United States released late this week show growth weak but faster than during the fourth quarter. The economy expanded at an annualized pace of 0.9% from the fourth quarter. While not yet meeting the conventional definition of a recession of two consecutive quarters of negative GDP growth, output remained weak in the quarter, below trend and well below anticipated 2008 growth of 6.7% in developing markets.

A panel of economists surveyed by the National Association of Business Economics anticipates an improvement in the credit markets and a bottoming out in housing late this year, but expects little U.S. economic growth in the first half of 2008. The panel of forecasters also cut its expectations for growth in the second half of the year.

Globally, the slowdown has been steepest in advanced economies, particularly the U.S. Growth in Western Europe has also decelerated, although activity in Japan has been more resilient. In Europe’s biggest economy, German output over the first three months of the year jumped 1.5% from fourth quarter 2007, the fastest pace in 12 years, while the French economy expanded 0.6%. In the continent’s second-largest market, after expanding 0.4% in the first quarter, UK economic growth may encounter stiff headwinds in the second quarter after consumer confidence suffered its biggest slump in since the onset of the last UK recession in 1990. From the fourth quarter, Japan’s economy expanded 0.8%, the fastest pace in a year.

The emerging and developing economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by China and India, although activity is beginning to moderate in some countries. First quarter Indian output climbed 8.8% year-over-year, igniting concerns of inflation, while China’s economy remained on track in the quarter to expand 9.3% in 2008. Based upon first quarter trends and as the illustration below shows, emerging economies worldwide generally expect to see faster economic growth in 2008 than in the more developed markets of North America, Western Europe, and Japan.