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Monday, June 04, 2007

Global Growth 2007

This article in Bloomberg is worthy of note:

When it comes to world economic growth, the glass is suddenly looking a lot more than half full.

Not only is the global economy confounding concerns about a slump, it's even performing better than some of the most upbeat analysts were predicting just a few weeks ago. Worldwide growth looks set to outstrip forecasts for a sixth straight year in 2007.

``Perhaps it's time to stop looking for reasons why the global economy will crash and instead think about sources for optimism,'' says Dario Perkins, senior European economist at ABN Amro Holding NV in London and a former U.K. Treasury official.

None of this is really news, but it is worth stopping to think about some of the reasons which lie behind this surge:

Behind the surprising strength: something old and something new. A resurgence in old-economy manufacturing and a wave of new-style financing are combining to push down unemployment and boost corporate profits. So far, these trends aren't fanning widespread alarms about a surge in inflation.

So the global economy is growing at above what may have been previously thought to be its capacity rate, and without excessive inflation, in part thanks to the high levels of liquidity we are seeing.

Also fueling the expansion are new sources of finance that have sprung up outside the banking sector. Hedge-fund assets have tripled in the past decade to $1.57 trillion. Private- equity companies may be headed for a record year of acquisitions, bidding $451 billion for companies so far this year, versus $229 billion in the same period a year earlier, according to Bloomberg data.

Such financing is ``pumping up the global economy in ways we haven't seen before,'' says Allen Sinai, president of New York-based consultants Decision Economics.

Sinai expects worldwide growth above 5 percent this year, faster than the International Monetary Fund's 4.9 percent April projection. If Sinai's right, 2007 would be the sixth straight year that the IMF's spring forecast proved too conservative.

It is interesting to ask in this context whether the worst of the US 'landing' is now behind us, or in the process of passing through. If this were to be the case then this would also put a bottom under the relative slowdown we have been seeing in Germany and Japan, and while these two 'old laggards' are hardly likely to carry the global economy on their shoulders they are likely to get a fresh lease of life from continuing strong demand for their products both in the US and in the rapidly growing young developing economies (as well as from the rather older ones in Eastern Europe), if the current win-win process continues to turn round and round.

So all of this needs watching very carefully to see just what can be learnt. Certainly much of what is happening could not have been clearly foreseen only four or five years ago, and it would be interesting to pin down the structural drivers a bit more clearly.

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