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Mood swings: the economic world this week

Mood swings: the economic world this week

Goldman Sachs chairman Jim O'Neill sees a perkier global economic outlook at the start of 2012. Will it last throughout the year?

January 23, 2012 5:16 by

…70 percent before one can assume China is urbanised. This involves around another 200 million people moving into cities.

Quite how there is supposed to be a nationwide house price bubble with this prospect ahead I have no idea, but many don’t seem to appreciate this. Moreover, as I pointed out at the GS macro conference where I spoke, in complete contrast to the US, Chinese house prices have reversed in the past 18 months because policymakers deliberately stopped them from rising. At some point, when they reverse policy tightening, the house price “problem” will turn out to be not as big a deal as so many fear.

A couple of other things caught my eye in this context this week. Indonesia had its credit rating revised back to investment grade by Moody’s this week, only 14 years since it was revised down to junk. (There is hope for Portugal and Greece too eventually.) And another FT story I saw suggested India, disappointed by 7 percent growth – close to the rate we assume for the decade – is considering a large public sector stimulus.

When I was quizzed last week about what could go wrong, I found myself thinking in terms of the Middle East. I think I noticed during my travels that Saudi Arabia is now suggesting it wants a $100 per barrel oil price, which suggests they are struggling to finance their big boost in domestic spending.

I say this, because from everything I increasingly read and hear, it seems to me as though the fundamentals for the energy markets are turning. Natural Gas prices continued to drop in the US last week linked to the remarkably rapidly shifting US supply and demand changes, and the IEA is revising down its estimates of global oil demand. The implied consequences for energy prices is obviously good, but if this is where things may head, some countries that have gotten used to constantly rising prices are in for some challenges. (Russia is obviously one of these countries, which is why Putin needs to deliver on his frequent suggestions of shifting the balance of their economy.)

Beyond this, it seems to me that there are so many exciting things going on, lots of focus on changing equity and bond market benchmarks and so on. We have done a lot of work on the equity benchmarking issue, and I am increasingly thinking we need to turn our attention to bond market benchmarks now too.

Jim O’Neill is the Chairman of Goldman Sachs Asset Management.

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