but i enjoy worrying
If even the gloomy Brits aren't worried......be happy, don't worry, even if Israel and/or the US attack Iran, which is the only foreseeable bump in the road.
The global economy is so big, not even the Lebanese incursion last summer - remember that? - had any effect on the Happiness, Prosperity and Good Cheer Express. Oh, sure, a few oil traders had their collective blood pressure go up for a few weeks, but in the end...you forgot all about it until I had to remind you of it, right?
business.timesonline.co.uk
Optimism for 2007 is well-founded
Anatole Kaletsky
For the third year running, happy new year is clearly an apposite phrase to begin my first Economic View. As in 2005 and 2006, the normally pessimistic opinion formers of the economic and financial world anticipate the year ahead with confidence and even pleasure. In my first article last year, I decided to take a contrarian view and concentrated on the risks to the world economy of a modest, but still not fully anticipated, US slowdown. Although this slowdown did eventually happen, it turned out to be even shallower than I expected. Moreover, the economic weakness was confined entirely to the US, so much so that the global economy as a whole actually accelerated in 2006. It is hardly surprising, therefore, that most economic models are now pretty bullish about the future and that stock markets are at or near record highs. In view of all this optimism it is tempting to repeat last year’s prediction that the year ahead will be tougher than expected and hope that, this time, the contrarian scepticism will pay off. Tempting, but probably wrong.
The period of greatest risk to the world economy is probably already over. Interest rates may still have a little way to rise in Europe and Japan. But the big rise in American interest rates, the doubling of oil prices and the inevitable correction in the US housing market have now happened. The biggest risks now stem not from economics but from geopolitics: most plausibly an outbreak of full-scale war in the Middle East, perhaps precipitated by a “pre-emptive strike” by Israel against Iran. But leaving aside such imponderables, the economic surprises of 2007 are more likely to be good than bad.
In most of the world, the mid-cycle slowdown discussed repeatedly on this page last year, has probably already happened and economic strength, rather than weakness, is likely to be the main surprise in 2007, especially the second half. According to Consensus Economics, global growth will slow slightly from 3.8 per cent in 2006, to 3.2 per cent this year, a rate which is almost identical to the 3.2 per cent recorded in 2005. The most significant slowdown is predicted for the US economy, from 3.2 per cent in 2006 to 2.3 per cent in 2007; but much of this deceleration has already happened, the worst of the housing slump seems to be over, employment is growing rather faster than in the last mid-cycle slowdown and exports will be boosted by the weak dollar. As a result, growth may well be nearer to 3 per cent than 2 per cent.
The eurozone and Japan are expected to decelerate only slightly, in both cases to about 2 per cent growth. Here, I think the risks are mainly on the downside. The eurozone, in particular, faces a tough year. Europe did much better than expected in 2006, but this is no reason to ignore the risks of big tax increases in Germany and Italy, combined with rising in interest rates and a hardening euro. German consumers will be hit today by a three percentage point increase in VAT. The breezy confidence about this event among politicians and business leaders is eerily reminiscent of Japan in early 1997, just before the three percentage point increase in consumption tax in that country suffocated a promising recovery and triggered the Asian financial crisis.
But whatever the problems of Europe, they are likely to be more than offset by stronger growth in Britain, China, India and Asia, excluding Japan. China, in particular, looks like accelerating, rather than slowing in the year ahead, as the Government opens the spending spigots ahead of the 2008 Olympics and the freshly refinanced commercial banks start multiplying the $50 billion (£25.5 billion) of capital they have just raised from Western investors, into new lending of $400 billion or more.
Looking at the world as a whole, therefore, consensus growth expectations are likely to prove too modest, rather than too strong. The other side of this coin is that inflationary pressures, while not alarming, may be quite persistent and interest rates, at least in America, Britain and non-Japan Asia, will probably end the year rather higher than investors now expect. At present, the US yield suggests a cut of up to half a point in the Federal Funds rate before June and perhaps a further easing to 4.5 per cent by the end of the year. In my view, however, there will be no need for the Fed to ease at all from the present level of 5.25 per cent and by the end of the year interest rates may well be rising. In Britain and Asia ex-Japan, too, interest rates are likely to rise further. My guess is around half a point this year. In the eurozone, by contrast, interest rates will have to be cut from the summer onwards as growth unexpectedly slows.
If this economic outlook turns out to be even roughly right, the financial implications could seriously wrongfoot investors. The euro, instead of rising further against the dollar as is now almost universally expected, would fall quite sharply, as it did in 2005. The dollar, in fact, will probably surprise most pundits by ending up as the strongest major currency of 2007, although the yen would also strengthen and might even overtake the dollar if the euro started to decline. Sterling is likely to trade somewhere between the US and European currencies, pulling back sharply against the dollar from its present overvalued level of almost $2, but strengthening against the euro to about 66p.
Finally, what about financial markets? Assuming that the global economy keeps growing as expected, equities and property in most major markets are reasonably valued and the shares of big multinational companies and banks, shunned by investors since 2000, are now downright cheap. There are signs of dangerous excesses in commodities, some emerging markets and junk bonds but, broadly speaking, the bull markets in shares and property have every reason to continue, at least if we look at economics alone. Whether global politics will permit this benign outcome is another matter. That is a question I will ponder in my column in the Comment section on Thursday.
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