While the U.S. market frets about the still-crashing housing market, the IMF buried the lede in its World Economic Outlook October 2007. About ten pages in comes this little gem, "For the first time, China and India are making the largest country-level contributions to world growth (in purchasing-power-parity terms; see the figure)."
There you have it. The V-12 of global growth is revving up in the Far East. U.S. consumption financed by debt-which has been the centerpiece of the global economic system for 50 years-is declining along with the value of the U.S. dollar.
Incidentally, accumulating a ton of debt is not a good way to inspire confidence in your economy. Data from the U.S. Treasury Department released yesterday revealed a massive outflow of foreign capital from the U.S. market. US$163 billion fled America in August. That kind of capital flight is astonishing…and it's confirmation that money goes where it's treated best, where yields are higher and asset values are rising faster than the currency is falling.
You can see from the IMF World Economic Outlook chart below that both China and India are now contributing more to global growth than the U.S. We don't expect this to be a one-off occurrence.
The IMF World Economic Outlook also produced some charts which bode well for Australia. With China and India driving global growth-and with both countries entering the resource-intensive phase of their development, you'd expect higher metals, energy, and food prices.
Metals prices are already fairly high, at least compared to the rate of growth in energy and food prices. In fact, the IMF World Economic Outlook chart suggests a correction in metals prices is probably in the offing, along with a structural increase in energy and food prices.
Speaking of that structural increase in energy prices, NYMEX crude touched US$89 in trading yesterday. How much higher can oil go before a) traders take profits, and b) high oil prices become a real drag on economic growth?
"The HIA today said housing affordability had reached its lowest level since the series began in 1984," writes Nicki Bourlioufas at news.com.au. "The HIA said a first-home buyer earning an average household income of $98,000 a year would have to commit 31.7 per cent of their income to buy a home, the highest on record."
Something has to give, doesn't it? Either incomes must rise or house prices must fall. Or a third possibility, expectations must be scaled back.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by DailyReader on 18 October 2007:
Not sure about other states but in Melbourne you have 2 property markets. The inner suburban leafy streets will continue to rise. It can be attributed to an influx of wealthy migrants from Asia who will purchase their homes with cash and with little or no debt. I don't believe prices will fall, maybe flat in the short term.
Comment by imran on 18 October 2007:
But in retrospect, the reason for the development of the Chinese and the indian economies would be the USA only.
US consumerism drove the demand for chinese products and their thirst for technology pushed the indian economy further.
Simplistically thinking, it would be a bad idea to accumulate debt and stir-up the economy but if you think a little deeply, the technological progress in the world is owing to this theory only.
For example if it weren't for the American Consumers and business' thirst for computers, the personal computer would not have been developed and perfected so rapidly.
The idea is that if consumers/users have access to debt they would perhaps demand more, thus turning the wheel of progress much faster then what normal demand would.
I think the American's is an ingeneous model. No wonder so many countries, sucessfully or unsucessfully, tried and are still trying to immitate it. I think the American damage control is yet to come.