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.
