World Growth Seen Slowing In Next 18 Months

Source : The Business Times, Tue, Sep 11, 2007

GLOBAL economic growth will probably slow over the next 18 months before picking up again, a top economist at Credit Suisse said last week.

Jonathan Wilmot, chief global strategist in the group's investment banking division, said: 'The world economy has been growing too fast for the past few years - it's hard to keep growing at the same pace.

'We do need a period of slower economic growth to relieve the strains on commodity prices and inflation pressures generally.'

The current financial market turmoil could trigger the slowdown, he said. Otherwise a 'policy-induced correction' by central bankers later will probably be necessary.

But Mr Wilmot is optimistic about equities in the longer term. 'I'm a bit cautious for September, not wildly optimistic over the next 18 months, but still bullish over three years or more,' he said.

Mr Wilmot, who is based in London, was in Singapore early last week as a guest speaker at a conference on the Asian fund management industry.

He said that if consumer spending in the US were to slow gradually, it would be good for growth in Asia. 'If the US grows more slowly, that leaves more room for Asia and Europe.'

But he warned that 'if US consumer spending goes into recession, Asia will feel it very acutely'.

John Lipsky, a senior official at the International Monetary Fund, has warned in recent weeks that the current financial market turmoil is likely to hit global economic growth.

Last week, Jean-Philippe Cotis, chief economist of the Organisation for Economic Cooperation and Development or OECD, also warned that economic prospects in the US, Europe and Japan have become 'less buoyant and more uncertain'.

'That's partly why markets are praying' for the US Federal Reserve to cut its main interest rate target to prevent a 'catastrophic decline' in US consumer spending, Mr Wilmot said.

The main worry now for the US economy is that 'if housing prices keep falling for long enough' the housing slump will lead to a sharp fall in broad consumer spending, he said. But he expects the US central bank 'would be able to react in time' to any signs of a potential recession.

Since the end of July, financial markets worldwide have been roiled by violent swings in share prices and a sudden reluctance by institutional investors and banking groups to lend money to one another.

Rising defaults and delays on mortgage payments by low-income home owners in the US earlier this year prompted a sharp fall in the value of financial securities backed by those payments. This in turn triggered a string of hedge fund collapses and losses by big banking groups that were forced to sell their investments in such securities at a hefty discount or to mark down their value.

The distrust and uncertainty in financial markets has led to a mutually-reinforcing cycle of falling prices across a range of risky assets, especially debt securities, and reluctance by private investors to inject new funds to help companies and banks raise capital.

As a result, central banks worldwide have had to pump money into the banking system to keep borrowing costs stable.

Some economists have warned of further trouble ahead in countries such as the UK which have also seen a sharp run-up in property prices in recent years. But Mr Wilmot said that although 'there is a squeeze developing in the property market in the UK', any difficulties UK home owners may face in meeting their mortgage payments would be 'much less important for the global economy'.