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It used to be that when America sneezes, the world
catches a cold and the Philippines picks up pneumonia. Not anymore.
This year, the United States
economy will slow down. But the rest of the world will not.
There are a number of reasons why
the rest of the world shops while America drops.
One, yes, the US economy will
slow down but it will be a mild one.
Two, the US influence on the
world economy, especially on Asia’s economy, is no longer as
profound as before. While the US economy has slowed, the rest of the
world has remained on track. Europe grew fastest in six years in
2006. In Asia, Japan, China and India are growing robustly.
Three, China and India are
picking up the slack where the US leaves off. China will grow by 10
percent this year, its usual rate. India grew 9 percent last year.
Four, the Japanese economy is
strong.
Five, inflation concerns have
eased, thanks to the lowering of oil prices. After hitting $73 a
barrel in August, they have hovered at below $60.
The global economy is set for
another good year in 2007, predicts Simon Johnson, director of
research of the International Monetary Fund, which has just
published its World Economic Outlook (WEO) for the year.
In 2006 the global economy scored
a robust growth of 5.4 percent¯the fourth consecutive year of
strong global activity. There has never been such a four-year growth
stretch since the early 1970s.
Says the IMF’s Johnson:
“Notwithstanding the ups and downs of financial markets recently,
the global economy is set for another good year in 2007. Our central
forecast sees global growth slowing mildly to 4.9 percent this year
with somewhat slower growth in the United States, continued solid
growth in Europe and Japan, and continued impressive growth in
emerging markets and developing countries led by China and India.”
“The risks to this favorable
outlook also look less threatening than they did at the time of our
September WEO,” he adds.
Why is the US slowdown mild?
Nearly everyone has heard or read about issues in the US housing
market, problems in subprime mortgages, bankruptcies and
foreclosures, and more recently softening of business investment.
“While the US may indeed have
sneezed, it appears to be a mild sneeze thus far, and not likely to
spread,” explains Johnson.
Emerging strains in US subprime
and mortgage lending where credit standards were clearly relaxed
have had no contagion effect.
Others may worry that the recent
bout of financial market volatility may begin to undermine the
strong global growth that we envisage. “I do not believe that the
financial tail is about to wag the economic dog,” assures Johnson.
In IMF’s view, the cascade of
selling in financial markets a month ago represented a limited and
largely temporary pullback from riskier assets including from
emerging markets, after a long period of market buoyancy.
“Markets have since rebounded,
and we see solid underlying macroeconomic fundamentals as providing
an anchor to skittish financial markets, rather than market
turbulence undermining economic momentum,” Johnson points out.
Still, financial markets can turn
abruptly, particularly for those emerging market economies that are
reliant on external capital, but where policy credibility has not
yet been firmly established.
It is a significant and repeated
irony in today’s world that success can substantially complicate
macroeconomic management by attracting a surge of capital flows.
Johnson says inflation concerns
have eased from six months ago as oil prices have fallen from their
highs of last August. But inflation does remain a potential concern.
In oil markets, too, spare
capacity is still tight, and the recent pic;kup in oil prices has
provided a reminder of the continuing risk of another oil price
spike.
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