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Stabroek News

The world economy in 2006
published: Thursday | January 5, 2006


John Rapley

THERE IS a mood of cautious optimism among commentators on the Jamaican economy. With inflation apparently abating, some growth projected, and the Government's budget deficit coming down, some are hoping for a rosy 2006. But of course, for a country as dependent upon trade as Jamaica, all depends on the world economy.

Happily, the omens for 2006 look fairly good, though as with home, so for abroad: caution is in order. There are hints that the United States economy will slow, though the fear of a recession being played up in some quarters seems overstated. Just before the end of the year, the so-called yield curve inverted for the first time in five years. The yield curve is an arcane concept of interest mainly to financial analysts. But the received wisdom is that when the yield curve inverts, it is a sure sign of a coming recession.

However, there are few indicators of a recession on the horizon. My own hunch is that the U.S. yield curve will begin to return to normal this year. Interest rates will rise, which could slow consumption and end the housing boom. It might also not be a great year for U.S. stocks. But barring a major collapse or financial shock, these developments will likely restrain, but not end, U.S. growth.

A couple of years ago, a slowdown in the U.S. economy might well have caused global problems. Since then, however, other growth poles in the world economy have picked up speed. Europe, if far from bubbling, is getting stronger. Japan, after more than a decade of slump, seems finally to have licked the problem of deflation. Analysts are optimistic, too, that Japanese economic policy will continue to favour growth. Long-term, Japan faces many obstacles. But for this year, at least, things are looking up.

STRAINS APLENTY IN CHINA

Then there is China. For years, China has been booming. For years, observers have wondered how much longer it can continue. And for years, it has continued. Strains there are aplenty in China. Its financial sector remains vulnerable to a shock. Investment seems unsustainably high. Meanwhile, rising social discontent constantly threatens to produce a major crisis.

Nonetheless, most specialists on China reckon that the authorities in Beijing will manage to keep a lid on all these difficulties. As investment slackens, consumption will probably pick up. There are signs that the fruits of three decades of growth are finally starting to trickle down to ordinary Chinese in the form of higher wages. It seems a safe bet that China will continue growing healthily this year.

But it is still a bet. And like all bets, a sudden change of circumstances could call them all off. Some risks - like a major terrorist attack or an influenza epidemic - cannot be foreseen. Others, though, offer some advance warning. And the risk of a dramatic, foreseeable shock to the world economy still appears greatest in the U.S.

With its unsustainable trade deficit and non-existent saving rate, a sudden loss of confidence in the U.S. economy could cause foreign investors to head for the exits. With other parts of the world now looking more attractive, the danger is that a run on the dollar could drive interest rates unexpectedly high. That could then cause a severe market correction that could ripple through the world economy.

For now, the world's monetary authorities look like they have things in hand. In particular, they are trying to engineer a gradual devaluation of the US dollar, particularly vis-à-vis the Chinese currency. Should they succeed in this task, 2006 should be a good year. Still, it would be prudent to keep a close eye on America's accounts.


John Rapley is a senior lecturer in the Department of Government, University of the West Indies, Mona.

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