Economists clash over growth forecasts

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Stephen Roach.

Consensus among the group of elite bankers and economists at DIFC Week was not achieved - top Western economists predict a global recession while regional economists are quite optimistic about emerging markets, especially those in the GCC and Asia.

Robert Shiller, Stanley B Resor professor of economics, Yale University, kicked off the week-long conference, and warned that possible speculative bubbles in stock, real estate and oil markets could cause instability in the global economy.

"Perhaps we have gotten a little too confident in the global economic growth. The problem is high oil, stock and real estate prices. There is a question about whether all this can be explained by low interest rates. This is a question that I can't authoritatively answer. But I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets.

"The unwinding of these markets is the most serious risk facing these markets today," he said.

"Real estate is another market that's bubbling," Schiller said. Looking at home prices in the Netherlands, Norway and the United State, he said that high prices in these markets in recent years suggest that "we are entering a new era of real estate speculation that is unprecedented. We are in a period where economic growth appears strong, and it's gotten into our thinking that real estate can only go up, and that it is a remarkable investment."

He noted that futures markets are predicting a 5-10% decline in home prices in the United States over the next year or so.

Echoing Shiller's caution, Stephen Roach, chairman of Morgan Stanley Asia, warned that "hot" emerging markets will be hurt by any slowdown in the US economy. Predicting that the US economy would enter recession in 2008, Roach said that US consumers drive the demand side of the global economy, while hot emerging economies "do not have as much dynamism on the demand side" as many people suggest.

"If US consumer spending slows in a material way, it is mathematically impossible for China and India to fill the void. The key question for the global outlook and for export-dependent countries is the fate of the US consumer," he said, arguing against the theory of a decoupling of emerging economies from those of the United States and Europe.

He noted that US consumption is worth US$9.5 trillion, compared with US$1 trillion in China and US$650bn in India.

"The consumption binge by the biggest consumer in the world is a housing-dependent story. But that's over. It's done", Roach said. As such, "the housing-dependent US consumer, lacking in support from income, is toast."

This, in turn, will negatively affect emerging Asian economies since "the dynamism in Asia is export and investment-led, and that investment itself is led by exports."

Roach also predicted that the oil price will probably fall, rather than rise, as the global economy goes into a down cycle.

Economists from the region, however were far more optimistic. Dr Nasser Saidi, chief economist with DIFC, noted that Gulf countries' foreign reserves have been growing throughout the decade standing at approximately US$365bn and set to grow to US$455bn in 2008 - and that total MENA foreign reserves are nearly US$1 trillion.

Because the region is more asset-based and has higher levels of liquidity than in previous oil price booms, it can better handle negative economic shocks from the rest of the world.

He said that the region is "living in an economic renaissance", in large part because of the "unprecedented value and depth" of investments in infrastructure, which now total more than US$1.3 trillion.

His optimism also was driven by sustained and unprecedented growth rates that the region has registered over the past five years - particularly given that "the initial impulse for this growth was oil-led, but now it is very much investment-led", mainly in infrastructure and private sector investments.

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