This has turned out to be a better year for the world economy than most people had expected. Both the IMF and the World Bank have revised upwards their projections for 2006. (See table alongside- the IMF forecasts from World Economic Outlook, September 2005 and September 2006; the World Bank forecasts are from Global Economic Prospects 2006 and 2007.). In 2007, both see a deceleration in growth with the IMF projecting a smaller deceleration than the World Bank. Note that the projected growth rates are still above the trend rate of 3% seen in the period 1980-2000.
So, the Cassandras have been proved wrong. They were telling us that the world economy would be on the skids for a number of reasons:
* Oil prices would go cross $100
* America's current account imbalances would unwind in ways that would derail the world economy
* America's housing sector would see a huge bust
So, what happened? Well, American current account imbalances remain. The housing sector has seen a slowdown but not a crash. But the biggest surprise has been oil prices. Oil prices were ruling above $75 in August. They have gone below $60. This is a level that the world economy can shrug off.
The decline in oil prices has meant that inflationary tendencies have been curbed everywhere and interest rate increases in the industrial world, including the US, have not seemed inevitable. In the US, the gradual slowing down of the economy- the much awaited 'soft landing'- has also meant that the US Fed has not been under pressure to raise interest rates.
I believe that one factor, more than anything else, has changed the global economic outlook dramatically: Israel's failed offensive on Lebanon in July.What's the connection?, you might wonder. It goes like this. America had planned an all-out assault on Iran, aimed at decimating Iran's nuclear facilities and defence infrastructure. But before this happened, the Iran-backed militia in Lebanon had to be neutralised. Otherwise, the Hezbollah would react to an American assault on Iran by launching long-distance missiles into the heart of Israel.
The Israelis got the opportunity they were looking for when the Hezbollah abducted two of their soldiers (although this was in retaliation for earlier Israeli abductions). They tried to pulverise the Hezbollah from the air. That didn't work. So they launched a ground offensive. To their chagrin, they ran, not into the sort of ragtag bunch of guerillas they had encountered in the West Bank and Gaza, but a force that was fully prepared for an invasion, well equipped and superbly trained. The offensive was called off.
This meant that war in the Gulf had been averted for the time being. The 'terror premium' built into oil prices vanished and oil prices started climbing down. That gave the world economy a huge boost. It follows that the key risk to the world economy in 2007 is America's policy towards Iran. The Bush-Blair duo faces a humiliating rout in Iraq and might want to salvage its legacy by announcing that Iran has ceased to be a nuclear threat to the world. If that happens, all bets on global economic growth continuing are off.
Barring a US-led war against Iran, the world economy should chug along and there is a good chance that growth will exceed the Fund-Bank forecasts in 2007.
1 comment:
Soaring oil prices and housing have helped to derail the economy
Surge in crude has had an impact – less disposable funds for other goods
The silent killer of our economy
Many Americans are changing their spending habits. Cost of energy and other necessities have gone through the roof, leaving very little disposable funds for other goods.
The sub-prime mass and the lack of mortgage funds for housing are increasing our economic nosedive. The Feds can lower interest rate, if the financial institutions are not providing financing and or asking for a large down payment and a perfect credit score, the economy is not going no-where.
When the housing market is down, there is a snowball affect on other industries, appliances, furniture, carpeting, etc.
Economists will tell you that; when income is not keeping up with increases in the cost of housing there bound to be fallout.
Our automobile industry has gone to overseas companies, jobs lost forever. We must wake up and take some dramatic initiative to change this economic course.
Jobs in the United States are continuing to go overseas, our export has diminished substantially over the past 25 years and our imports have increased substantially in the same period.
We have resources, we have technology and manpower, why are we not utilizing them and devise a mechanism to re-instate our economic independence.
Put the politics and egos aside, let us all unite in a common cause, consider what is really good for our country without any hidden agenda or political favors. Bring honesty and integrity to our society; re-instate economic boom and fiscal responsibility.
We have been behind the eight ball before; we can muster whatever it takes to turn around our economic downturn.
Politicians are spending millions campaigning; those funds can be utilized for better purpose. Do not give me promises and tongue twisting, empty promises are easy “show me” that is the motto..
Yehuda Draiman
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