Global economy steady in 2007-- Watch for three risks

January 10, 2007

Despite the U.S. economy's slowdown, and even despite the U.S. housing market slowdown, the global economy in 2007 will remain fairly consistent with that of 2006. This was according to both the President of the European Central Bank (ECB), Jean Claude Trichet, and the Managing Director of the International Monetary Fund (IMF), Rodrigo Rato. These estimates are supported by the World Bank’s current projection of global economic growth of 3.9% in 2006, 3.2% in 2007, and 3.5% in 2008.

What factors support a steady global economy:
The factors that supported the global economy in 2006 are pretty much still with us:

• Global liquidity, a result of central banks’ increase in the money supply. This is starting to dry up in 2007 as central banks raise rates.
• Oil prices in the range of $60-$70 per barrel. OPEC, Russia and Venezuela will continue to bring upward pressure on the price of oil, no matter what happens to demand.
• Manageable, relatively low inflation.

Risks to the global economy:
However, if any of the following occur as a major trend, the global economy could be thrown off:

• Strong protectionism, as had been shown towards China last spring.
• Overextended credit in the U.S. caused by exotic home loans, severely damaging consumer demand.
• A run on the dollar as a result of panic over the U.S. current account deficit.

Action steps:
Maintain a diversified portfolio with a higher allocation of international funds than U.S. funds to take advantage of EU, Japan and emerging market growth. Keep alert for the warning signals that could disrupt this growth.

Source: International Herald Tribune, “ECB Chief sees 2007 global growth close to 2006.” January 9, 2007; Bloomberg News, “Trichet confident that EU will cope with slower U.S.,” January 8, 2007; Reuters, “Update 1 - World growth encouraging, risks low, G-10’s Trichet,” January 8, 2007; The World Bank, “Prospects for the Global Economy, 2007.”