By Leo Bland Salomon Smith Barney believes that slowing global economic growth in 2001 will lead to...
By Leo Bland
Salomon Smith Barney believes that slowing global economic growth in 2001 will lead to investor caution amid concerns over profit disappointments.
Kermit Schoenholtz, chief economist at Salomon Smith Barney, said factors including high oil prices are slowing global growth and this is leading to a fall in global liquidity.
Schoenholtz said: "However, the trend towards deteriorating global liquidity probably will abate and eventually reverse during the course of 2001, helping to sustain expansion through 2002. The threat from inflation in the industrialised world remains low, in the light of the sustained US productivity boom and excess capacity in Japan. In the absence of a new oil spike or a supply disruption, monetary authorities in the industrial world do not need to slow economic growth sharply or durably below trend."
He believes this relatively benign outlook for the global economy reflects the long-run trend towards the increased influence of market forces in many economies around the world. Schoenholtz said: "Some of these forces, including open trade, dynamic capital markets, widespread deregulation, reduced fiscal activism and accelerating innovation are especially evident in the marathon expansion in the United States. Overall, we expect that global economic growth in 2001-2002 will remain somewhat above the 20-year norm of just under 3.5%. Our analysis suggests that investors will remain defensive in the near term, favouring safe-haven US Treasuries at lower yields. Nonetheless, a reversal of liquidity trends in the course of 2001 will also probably lead to a rebound of risky assets, ranging from equities to private-sector bonds, so that investors will need to remain nimble."
He added that the euro appears to be undervalued but said that the continued gap in productivity between the US and other industrial economies puts a limit on the downside for the dollar.
Schoenholtz pointed out that high oil prices are acting like a tax on users in the current era of price stability. As a share of OECD nominal GDP, oil expenditure has increased from less than 1% in 1998 to more than 2% in 2001 and will remain close to 2% in 2001 even if, as the group forecasts, oil prices fall towards $25 per barrel over the next 18 months.
He said: "This year industrialised country economic growth averaged 4%, the most rapid pace since 1988. At the same time, oil prices jumped to the highest level since the 1990 Gulf War spike. Adjusted for consumer prices, the 1999-2000 oil price surge is comparable in scale to the 1974 oil shock and unsurprisingly industrialised country headline inflation accelerated this year by nearly a full percentage point to 2.25%.
"Nonetheless, we strongly doubt that stagflation will prevail in 2001-2002. In Japan the broadest measures of the price level are likely to continue to decline. In the US, inflation expectations remain low, in sharp contrast to previous oil shocks. In the euro area, the combination of the plunging euro and rising oil prices has lifted inflation worries but core inflation, at about 1.5%, remains consistent with the European Central Bank's sub-2% target."
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