Money Moves Markets

Key themes in my outlook for 2008 were 1) global economic resilience despite the credit crisis, 2) US outperformance of Europe and 3) inflationary risks stemming from the Fed’s excessive policy easing.

These themes receive support from the IMF’s latest global economic forecasts, published last week.

The IMF now believes world GDP will rise by 4.1% in 2008, up from 3.7% in April. 4.1% is a respectable number by historical standards – growth averaged just 2.9% over 1990-99.

Among the major economies, the US has received the largest upgrade – growth is now forecast at 1.3% in 2008, up from just 0.5% in April. This could still be too low, with second-quarter figures next week likely to show annualised growth of 3% or more.

Meanwhile, average 2008 consumer price inflation has been revised up by 0.8% and 1.7% in advanced and emerging economies, to 3.4% and 9.1% respectively.

Looking forward, relatively loose monetary policies and solid emerging world momentum should continue to limit global economic weakness. Downside risks stem less from the credit crisis than an inflation-induced squeeze on real incomes.

A key issue is whether US and emerging world resilience is offset by gathering weakness in Europe. Today’s flash PMIs for July show the Eurozone economy was slowing sharply as the second half began – see chart.