World in 2007, some thoughts after the conference
I am waiting for my flight on the Vienna airport. I have half an hour free time so I decided to put together my thoughts after the conference on global outlook and global imbalances I attended in Vienna. During the conference I had a chance to listen to and speak with chief economists and strategists from major investment banks. It would be fair to say, that there are some issues on which they broadly agree, and some issue that are highly controversial.
US growth and EU growth
There appears to be a consensus (with maybe one or two dissents) that US will experience soft landing in 2007, which would mean a continuation of good times for emerging markets, which should perform very well as an asset class. Some people believe that US productivity trend has slowed after 10 great years, and that EU trend productivity growth will outpace that in the US. Others strongly disagree, citing US ability to tap opportunities of globalization much more skillfully than EU. There is also no consensus on the decoupling story, some people believe that Europe and Asia are well positioned to weather the US slowdown, others argue (and I agree) that growing trade and financial links make transmission of shocks stronger than before, including US slowdown shock.
China and India
Macro people may underestimate downside risks to sustainable growth in China and India. In China price distortions create significant risks (undervaluation of renminbi lead to misallocation of resources to export sector, interest rate lower that rate of nomila GDP growth produces massive investemts of dubious quality, and land price controls produce massive real estate overinvestment). These was working fine in the past, but reached leves which are associated with systemic risks. In India war for talent and wage increases which attract public attention in tnhe wet are problems for 1 mln workers (IT, call centers, BPO and other outsourcing activities) while for the reaming 599 mln of workers there are falling real wages and incresing amount of malnutrition, worsening education, 50% of kids do not go to school, number of people living below poverty line goes up as well. This has already changes political preferences among Indian farmers. All fo this takes place while we enjoy strong global growth, so Pandora box may open when global growth will slow.
There has been a lot of attention given to likelihood of currency unions collapse. Professor Mundell, who had a guest lecture said EMU collapse was extremely unlikely and most people agreed. However many people raised an issue that financial markets may become a source of shocks in the future, which may hit the global economy at times which would be less prosperous. Evidence suggests that we will enter 2007 with strongly leveraged positions and further attempts to enhance yields, with local emerging markets investments providing good diversification opportunities.
My speech at the conference dealt with implications of global imbalances for emerging markets, you can find it here.