Global economic growth: have we avoided a downturn?

It seems markets have quickly tired of the slowdown play - asset markets have enjoyed a resurgence on the back of cheaper crude. But is the lower price of oil all it's cracked up to be? asks Stephen Roach.

Financial markets have quickly tired of the slowdown play, and the reacceleration bet is being priced back into asset markets. Equities love it, bonds have sagged a bit, the so-called spread markets (i.e., emerging markets and corporate credit) are thrilled, and commodities are re-energized - no pun intended. It's as if a $46 trillion global economy turned on a dime. I've learned never to say never, but I suspect this flip-flop will be short-lived. Relative to the consensus mindset, I continue to believe that there is a much greater chance that global growth will surprise on the downside in 2007 rather than on the upside.

Three developments have altered the cyclical growth outlook - sharply falling oil prices, Fedspeak, and the ever-present China factor. The energy story gets top billing. Spot oil prices are down nearly 25% from their mid-July highs and prices of refined petroleum products have tumbled even more. In the US - whose consumers have long been the major engine of global demand - this is being billed as a veritable bonanza. With wholesale gasoline prices plunging by some 75 cents per gallon and natural gas and home heating oil quotes also moving appreciably lower, Dick Berner has calculated that there could be an energy-related windfall of some $120-130 billion in discretionary income. It's the functional equivalent of a major tax break heading into the all-important holiday shopping season - another stroke of luck for the fabled American consumer.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.