It’s better than you think, says Goldman Sachs chief economist Jim O’Neill.
The bank held a webcast last Friday, entitled “Why the world is better than you think,” and late on Wednesday published an accompanying note. Cynics might say that in between Friday’s discussion and Wednesday’s publication, markets had a precipitous slide, but we, will, um, resist.
Here’s the intro of the note:
In the past few weeks, the world has suddenly seemed quite a scary place again—at least judging by the financial markets. Indeed, some of the recent market adjustments have been more abrupt and severe than many of the other sell-offs we have seen since the ‘bottom’ of the markets in the spring of 2009 . . .
This week we take another look at the environment and put the EMU ‘crisis’ into a global perspective—and into context in terms of policy responses to market disruptions in the past. Our main conclusion is that, while it is true that EMU is undergoing a severe crisis, especially following the co-ordinated policy response, this is not likely to be a source of global financial market contagion, nor is it likely to be the source of a major renewed European economic downturn.
And on the future of the eurozone:
Observers should not exaggerate the importance of European growth, especially domestically-generated growth. The ability of Europe, and in particular the Eurozone, to exhibit strong real GDP growth is quite limited given its many well-known structural rigidities (such as an ageing workforce and limited productivity). We assume the Euro area’s growth potential is a little less than 2%. However, there is widespread and growing evidence that Europe is recovering from the recession of 2009. Moreover, the policy response unveiled last weekend should, if anything, probably be regarded as a positive development for the recovery of the net Euroarea economy, irrespective of what happens to aspects of EMU and the performance of the Euro (because monetary policy is friendlier and financial conditions easier than would otherwise be the case).
Nearly 70% of the Euro-area economy is made up of three countries, France, Germany and Italy, and unless the sovereign debt crisis derails their economies, it is tough to see how the Euro area could weaken sufficiently, even with the possibility of sustained domestic demand weakness in other, smaller economies.
Spain, however, is a slightly more worrying matter:
Spain is a different issue, as it is four times larger than Greece and has had a notable impact on the Euro-area economy in the last decade. If Spain were to face the same severe turmoil as Greece, then the consequences might be somewhat more severe. Moreover, if Spain were to become completely embroiled, the degree of cross-border financial exposure for the entities based in the larger Euro-area economies would multiply dramatically, and the consequences would change.
This is why European policy-makers acted so aggressively last week both to ensure sufficient liquidity in bond and money markets, and to give notice to market participants that, if needed, ample funds would be available to support the bond-raising needs of the Euro area.
As for Greece, it is teeny-weeny to Goldman:
Greece Simply Doesn’t Really Register
To sum up the Greek issue in terms of economic importance, over the past decade Greece has had less global economic importance than Iran, and only marginally more than Nigeria. Meanwhile China, which is 14 times bigger than Greece, saw its GDP increase in US Dollar terms by around 25 times more in the last decade. . .
What really matters then, says O’Neill, is what happens in China and the US. And on the US front, Goldman thinks that “many coincident indicators suggest that there may be some upside risks to our current forecasts.” As for China, it is “likely to experience some slowing” — but that’s a good thing.
Unsurprisingly the bank is well above consensus for 2010 and 2011 world GDP growth:
More unfettered optimism Full note in the Long Room.
Related link:
Oops, Goldman didn’t do it for their clients again – FT Alphaville