The Global Economy 2006

While the term “globalization” is now commonly used and our new interconnectedness is most obvious in several ways, our new interdependence also de-emphasizes the contribution of any one player to the global machine. Though the U.S. economy grew 3.3% in the past year, the world’s growth was led by predicted strength in China and India, and the Eurozone surprised with upside despite flat initial predictions.

In 2006, U.S. economic growth was mixed, as was capital spending, across industries. However, there were steady moderate gains in corporate profits and cash flows. The job market was reasonably strong, with weakness primarily in manufacturing and construction mirroring the decline in residential construction. Following the “unacceptable level” of core inflation cited by policy-makers early in 2006, the subsequent actions of the Federal Reserve effectively reined-in the trend. Economists have predicted that the U.S. dollar will likely continue its weak position against other currencies and exports will continue to grow, albeit moderately.

In the eyes of many economists, the world economy has been gradually uncoupling from U.S.-specific fluctuations. Some, such as Nariman Behravesh of Global Insight, believe that significant decoupling has already occurred and point to the remarkable strength of China (led by industry) and India (led by the consumer) in 2006, despite the downturn in the U.S.

An opposing view says the current case for decoupling in Asia is weak, because the majority of demand in these economies still does not arise from the domestic markets. India, representing less than 20% of Asia’s (ex-Japan) economy, has been the only country to successfully stimulate domestic private consumption growth, says Chetan Ahya of Morgan Stanley, though still that consumption is tightly linked to global liquidity and thus is still “coupled”. Looking to the future, however, China’s strategic policy is moving to actively stimulate domestic consumption ahead of exports and investment, an initiative that should be assisted by the build-up to the 2008 Beijing Olympic Games.

In 2007 according to most prognosticators, China and India are expected to continue to return excellent numbers, and the Eurozone should see only slight lessening of momentum; the U.S. will hopefully suffer only a “soft landing” amidst soft housing markets and a soft dollar. Oil prices are likely to stay high, in the $60-65 range both due to OPEC policy and steady demand, but the good news is that record oil prices have had minimal impact on inflation around the world. Given the studied caution of the world’s central banks, inflation should not be a problem in any leading economy in the coming year. While the economic consensus for 2007 calls for a slowing of growth across the global community, worldwide interconnectedness will only continue its growth providing opportunities to those with a global market view.