The Global Economic Outlook ... An Overview
I already touched upon this with my previous post about the Eurozone as I argued once again the slighty pessimist (I like cautious better) case against a sustainable recovery of the Eurozone. Now I have said this before but since it is an important initial point to make I will say it again ... all 'these things' are inter-connected. If we begin with the global economic outlook we can immediately make this issue operational through the idea of global economic imbalances. This would then take us to either the Eurozone, US' housing market and possible slowdown, or China and the petroexporters (I do not have a specific link here but do go see the excellent Brad Setser for more on this).
So first of all I will (try to) keep my own opinions in check on this one since I have enough to do holding together all the sources I want to refer to. My basic methodological point here is that whatever salient issue we have here be it the US housing market, Chinese savings, the Eurozone's trade balance etc they all tell a part of the same story. So where are we in the global economy right now? First of all something is happening which, at least in theory, could seem to hail the unwinding of those global macroeconomic balances. The US economy is slowing which will most likely make the current-account deficit shrink and thus the global imbalances will (can) unwind. Secondly many are then pondering the effects outside the US. Lastly, will the landing be tough or soft? An important point here before I provide you with a myriad of links is consequently that when we are talking about whether the US landing will be soft or tough and whether the unwinding of global imbalances will be soft or hard we are in fact asking the same question. Obviously the second question inflates the perspective but the idea is the same ... now let us indulge in some references here shall we?
First off let us begin with the discourse from the IMF which is rather pessimistic ...
'The world is set to enjoy a fifth record year of high growth next year, says the International Monetary Fund, but it warns that the risks of a sharp slowdown have significantly increased.
The IMF will say next week that the world economy is on track to grow at 5.1 per cent this year but the risk of a severe global slowdown in 2007 is stronger than at any time since the 2001 terror attacks on the US.
“Risk to the global outlook is clearly tilted to the downside,” the IMF said, adding, “there is a one-in-six chance of growth falling below 3.25 per cent in 2007.”
“There is considerable uncertainty about whether the global economy will achieve a soft landing to a more sustainable pace of expansion or whether the world faces a period of sharply slower growth,” the Fund report says.
“Tight commodities markets are contributing to inflation concerns and the risk of a growth slowdown,” it warns. For that reason, “further [monetary] tightening cannot be ruled out” in the US, while “in the euro area, some further tightening will likely be needed to maintain price stability in the medium run”.
And let us stay with those commodity markets shall we? Consequently, the fund forsees that the commodity price boom will wear off which means that big commodity exporters could be in for a more mild windfall in the future. In terms of global economic imbalances this could potentially be one of those 'unwinding factors.'
'The commodity price boom over the last three years is unsustainable and will result in sharp price declines by the end of the decade, the International Monetary Fund has warned.
However, the fund is not predicting an immediate price collapse and its chief economist, Raghuram Rajan, said on Wednesday that metal prices were fairly valued.
Higher commodity prices have boosted the economies of resource-rich nations in the Middle East, South America, Africa, as well as Canada and Australia, but have added to the import bill in consuming countries in North America, Europe and Asia.'
Jean Cotis from The OECD also recently gave his view on the global economic outlook ... Cotis is more balanced than the IMF outlook. It is important to note the notion that the economies are growing around potential which means that the current business cycle is topping.
'As projected in the May 2006 OECD Economic Outlook, activity in the OECD area as a whole is set to grow around potential during the second half of this year, with some gradual rebalancing between the two sides of the Atlantic. In this context, the recent data for the first half of 2006, indicating a much strongerthan- expected performance in Europe and a significantly weaker one in the United States and Japan, should not be merely extrapolated going forward. Indeed, following this catch-up, growth is likely to slow somewhat in Europe whilst the US and Japanese expansions regain some momentum.'
Homing in on the unwinding of the global imbalances the recent Lex column in the FT has a very thoughtful comment which deserves notice.
'Can the G7, which meets later this month, take a more sanguine view of currencies in the hope that slowing US demand will shoulder the burden of current account adjustment?
Unfortunately not. With the US deficit at 6.4 per cent of gross domestic product, the reduction in demand needed to dent it is considerable. Total US demand for tradeable goods, including net imports, is equivalent to over 30 per cent of GDP.' (...) US demand cannot be reduced in isolation. Growth must be rebalanced, with countries in surplus reducing their excess savings to offset the reduction in demand for their exports.' (...) US consumption, Asian savings and the dollar all need to fall. Unfortunately, this inter-relationship is often lost in individual nations’ efforts to lay the blame for global imbalances at someone else’s door.'
Lastly I would also like to point to an excellent post by Mark Thoma on the subject at The Fistful where he is currently enjoying a spell of guest posting. Mark's post itself contains myriad of links and you should definitely take your time on this one because also the commentary section is a good read. On the post itself I particularly like Mark's methodologial approach; an approach I am trying to emulate with this and other posts on this topic of the global economy.
Three very salient questions are addressed in Mark's post ... like I said remember; this is all inter-connected!
1. If Housing Crashes, How Can the U.S. Avoid a Recession?
2. Can Strong Growth in the Rest of the World Save the U.S. from a Recession, or Would a Recession Spread Outside U.S. Borders?
3. Can a Fall in the Value of the Dollar Save the U.S. from a Recession?
If you want a good conceptualization of the issues pertaining to the global economy right now I highly recommend Mark's post.
Lastly before I leave you to chew on this one we might want to finish off with the US housing market and economy in general since an awful lot of all this hinges on how we see the recent developments here. Here I have two blogs for you. For the tough ones I recommend Nouriel Roubini who have been very pessimistic lately about the US economy and particularly the housing market. However, Roubini's scaremongerings are a bit like a very strong chili con carne and without anything accompanying it you are left sweating and gasping for air; in order to avoid this, some cool reflections on the US economy should be provided from Dave Altig at Macroblog.
The text and links above should provide you with a reasonable starting point to the global economy as it looks now. I also encourage you to shop around here at Alpha.Sources for posts on the topics above; there have been quite a lot recently and the references are good to bookmark for later reference. And do remember ... whether you are concerned with the Eurozone economy, the US economy, Asian savings/Chinese exchange rates, and/or Petro exporters remember not to look at them seperately but as a whole. This might sound simple but it is the first important recognition you need to make before digging into any of these individual issues above.