While the U.S. market frets about the still-crashing housing market, the IMF buried the lede in its World Economic Outlook October 2007. About ten pages in comes this little gem, “For the first time, China and India are making the largest country-level contributions to world growth (in purchasing-power-parity terms; see the figure).”
There you have it. The V-12 of global growth is revving up in the Far East. U.S. consumption financed by debt-which has been the centerpiece of the global economic system for 50 years-is declining along with the value of the U.S. dollar.
Incidentally, accumulating a ton of debt is not a good way to inspire confidence in your economy. Data from the U.S. Treasury Department released yesterday revealed a massive outflow of foreign capital from the U.S. market. US$163 billion fled America in August. That kind of capital flight is astonishing…and it’s confirmation that money goes where it’s treated best, where yields are higher and asset values are rising faster than the currency is falling.
You can see from the IMF World Economic Outlook chart below that both China and India are now contributing more to global growth than the U.S. We don’t expect this to be a one-off occurrence.
The IMF World Economic Outlook also produced some charts which bode well for Australia. With China and India driving global growth-and with both countries entering the resource-intensive phase of their development, you’d expect higher metals, energy, and food prices.
Metals prices are already fairly high, at least compared to the rate of growth in energy and food prices. In fact, the IMF World Economic Outlook chart suggests a correction in metals prices is probably in the offing, along with a structural increase in energy and food prices.
Speaking of that structural increase in energy prices, NYMEX crude touched US$89 in trading yesterday. How much higher can oil go before a) traders take profits, and b) high oil prices become a real drag on economic growth?
“The HIA today said housing affordability had reached its lowest level since the series began in 1984,” writes Nicki Bourlioufas at news.com.au. “The HIA said a first-home buyer earning an average household income of $98,000 a year would have to commit 31.7 per cent of their income to buy a home, the highest on record.”
Something has to give, doesn’t it? Either incomes must rise or house prices must fall. Or a third possibility, expectations must be scaled back.
Markets and Money