RIYADH, 22 January 2007 — As we look ahead, geopolitical risks that were paramount in 2006, seem to have given way to economic and financial risks as key uncertainties for the global economy. The main evidence of this is oil prices, which, unlike last year, have continued to fall this year, despite rising geopolitical tensions.
The global economic recovery that started in 2003, first with the US and then with the euro zone and Japan, seems to be losing steam. More disconcertingly, even as global growth seems to be slowing down, inflation remains a concern and pockets of weaknesses have developed, e.g., the housing sector in the US, that threaten to derail growth altogether.
Although, latest data were positive, the US remains at a crossroad — recession or soft landing — with the housing market looming and withdrawal of liquidity as risk factors ahead. Japan, the most dependent of all major economies on the US, shows renewed weakness. Japan’s central bank may have re-ignited this weakness by prematurely raising interest rates and choking off a recovery in domestic demand. Europe is following the US up cycle with a lag, and experiencing strong growth. According to Riyad Bank Europe to enter its deceleration phase before the end of the year.
In its latest report on the global economic outlook, the Organization for Economic Cooperation and Development (OECD) described the situation as rebalancing of growth across the major economies, “Rather than a major slowdown, what the world economy may be facing is a rebalancing of growth across OECD regions.” The report continues, “Until recently, the OECD area was enjoying a prolonged period of non-inflationary growth despite rising oil and commodity prices.”
“Recent developments point to an unwinding of cyclical differences, with activity having slowed in the United States and Japan, and gathered speed in Europe. Looking ahead, and given what is seemingly a mild degree of initial excess demand in the United States and Japan, the slowdown in these countries should remain well-contained. In the euro area, recent hard data as well as business and consumer confidence suggest that a solid upswing may be under way. In addition, growth should remain buoyant in China, India, Russia and other emerging economies. All in all, Japan and the euro area would grow slightly above trend over the next two years while US growth would return progressively to potential in the course of 2007, following the recent deceleration in activity.”
Due to falling oil prices and OPEC-led cuts in oil production, the bank expects economic growth to slow down in the region. Key challenges for the region this year include: Falling oil prices, slowing liquidity, rising inflation, and weak stock markets.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)