GARETH COSTA Comment – the outlook for world economic expansion THE WORLD is in some phase of the largest economic expansion in history, but while continued growth is starting to look wobbly, the media abounds with experts predicting that all will remain fine in the long run. But business planning requires reliable input, so how good has the recent forecasting been? Like supertankers, economies have momentum which keeps them moving forward even when the breaks are applied, so backward-looking data can easily override the more immediate signs of slowdown. Two years ago when oil spiked to around $65-$70 there were precious few economists and financial commentators giving any credence to the idea that inflation would result, insisting that there was no wage push on inflation, despite this crucial global commodity being three times higher than a year earlier. Now two years later the US sits between a rock and hard place, with the Federal Reserve Board stuck with the sub-prime liquidity crisis on one hand and inflation on the other! Then, in the early stages of the sub-prime credit crisis these self same analysts were once again insisting that there would not be an impact on the greater US economy. The Fed Governor first predicted a cost of $50billion, later revised to $150billion. Now Goldman S achs, the one financial institution to actually make money from the crisis, recently forecast the cost to banks at $500billion. But the wider impact to the US economy will be in the region of $2trillion of drained liquidity. Very few are now arguing that the US economy won’t feel some level of pain, but the argument is that vibrant Asian economies will take up the US slack and save the world from widespread recession. Except, US consumers alone account for about 20% of global consumption, and Morgan Stanley’s Asian chairman Stephen Roach says Pan- Asian exports have never been higher and private sector internal consumption never lower, meaning that Asian domestic consumption “will not nearly be enough to offset a demand shock made in America. Last year America was a $9.5trillion consumer...China is a $1trillion consumer and India a $650billion consumer.” Over 20% of China’s exports head into the US, so any cutting back by consumers is going to have a significant impact in China, but the ripples will spread far wider. This week Goldman Sachs puts the risk of a US recession at 40-45%, but the slowdown is already starting to be felt around the world. Closer to home spendthrift consumers are feeling the pinch of higher interest rates and fuel prices. US housing, one important component of the global valuations pyramid, is wallowing in quicksand. US median house prices fell 13% in the past year, wiping about $2.6 trillion in value from the national balance sheet. If as expected house prices sink further or stock prices slide, inducing negative wealth effects to feed through to spending patterns and finally the bottom line of corporate USA, demand for Asian goods will slump and commodity demand will shrink, affecting African developing country growth too. The cycle of global prosperity was underpinned by loose lending on overinflated US house prices, but with inflation ballooning now it looks like payback time, especially for all around the world who borrowed to enjoy these best of times. ● Some argue vibrant Asian economies will save world recession but ● US consumers alone account for 20% of global consumption.
