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Will Global Markets Continue To Rise In 2007?
Rarely has the New Year dawned so brightly for the world economy. Have we been lulled into a false sense of security?
This New Year finds the City in the midst of a golden age. We are backing in extraordinarily benign global economic conditions. Not since the early Seventies have we enjoyed such a sustained bout of fast-paced growth and trade expansion, and almost everyone seems optimistic.
All 49 economists answering the FT's annual poll assessed prospects for 2007 in far more positive terms than in either of the two previous years. Most considered Britain's economic prospects to be sound, with the main risks coming from abroad; but even then the consensus was that a major upheaval was unlikely.
Such unbridles optimism should, in itself, be considered a dangerous sign. In the past, prognosticators were quick to highlight the risks, but as memories of the tech bubble fade, the rear-view mirror is looking perfectly clear, seducing us into the belief that the road ahead will be bump-free.
That doesn't leave much room for bad surprises – and the jitters of last May should serve as warning of what happens when confidence is shaken. There's a danger investors are living in a fools paradise.
The assumption is that the tide of liquidity – boosted by low interest rates and strong corporate cash flows – will continue, and that the credit cycle has been tamed or abolished. Yet there is little doubt risk aversion is due for a comeback.
The outcome of the great standoff between the investment markets and the US Fed over the direction of interest rates is a key question, but at least it's a known unknown. What will probably matter much more are the unknown unknowns – the questions that arise from events no one foresees.
The obvious place to look for the first sign of trouble is Asia – now the key source of the global economy's strength and weakness. If Asia's bicycle stops pedalling so furiously, we all risk falling down, yet the rise of the East should be a source of comfort: the current US slowdown would once have written the script for the entire world economy.
How long can the boom last? The best guess is that the wind is set fair, at least until the 2008 Beijing Olympics when there's every chance that China will metaphorically collapse, bringing the current cycle to a ragged conclusion.
Since that's still some way off, the bulls are right: there's even more reason for optimism today than there was a year ago.
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