Jeremy Warner Outlook: It's not yet time to heed the prophets of doom. Markets are due one more good year yet

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The Independent Online

The International Monetary Fund used to be a perennially gloomy organisation. For years, its World Economic Outlook routinely focused on the risks to the world economy rather than its positives. Pretty grim reading this has made too. Any casual observer would have thought we were heading for hell in a handcart, though counter intuitively this dire view of the world tended not to be backed by the hard numbers of the IMF's own economic forecasts.

These have been broadly correct in predicting the current boom in the world economy. This year will be the fourth in which world growth has been at or above 4 per cent, the longest such period of above-trend expansion since the early 1970s, before the first oil shock.

Yet the accompanying commentaries have failed to reflect this benign reality. Until last year, that is, when there was a notably less doom-laden tone to the IMF's analysis. The IMF's record of alarmism would lead you to expect the opposite of whatever the organisation had to say. If the IMF was being sanguine, surely things were about to turn for the worse? As is now apparent, they did not. Growth this year is likely to be only slightly less than the previous two. The prediction is for more of the same next year too, again with the same broadly optimistic tone which coloured the analysis last year. Both business leaders and the financial markets have taken this sunlit outlook to heart.

With share prices again reaching for the skies, merger and acquisition activity at an all-time high, and buoyant corporate profits, not since the dot.com boom of the late 1990s has there been a more exhuberant or confident mood. Of course, last time around, euphoria of the type we are now seeing in financial markets marked the start of a prolonged downturn. Is the same thing about to happen again?

In attempting to answer this question, I should make reference to my own predictions for 2006, made around this time last year. Thankfully, I chose to ignore the warnings of a world economy about to be brought low by a mountain of debt, global capital imbalances, housing slumps and geo-political tensions. As a consequence, I was spot on with my forecast of 3 per cent growth for the US, though I was a little too cautious about the UK and Europe, where GDP has been better than I predicted.

These latter two phenomena are largely down to the economic revival now taking place in Germany. What sceptical commentators saw as a short-term blip across the Channel now looks as if it might turn into a sustained recovery. Yet the big story this year was plainly the continued advance of Asia, which is dramatically changing the way we must think about the world. It's fair to say that everyone spotted that one. However, there are some particularly daft conclusions that have been drawn from it.

Paradoxically, the rise of China may be one of the biggest causes of the great outpouring of gloom-laden prediction we see from the sociopolitical intelligentsia of the developed West. For us, there is much more reason to feel pessimistic about the future than there is in China and India, where the consensus view is one of betterment and advance. America's view of itself, by contrast, has rarely been more negative.

For many Americans, the failure of policy in Iraq is only a metaphor for the decline in US geopolitical dominance. It can surely only be a matter of time before this waning of ideological, cultural and military influence is matched by an equally humiliating nemesis in economic performance.

With jobs and expertise now routinely outsourced to the developing world, that future already seems to be fast approaching. The perception of decline, real or imagined, invites an apocalyptic take on events. Yet no longer can the world be seen entirely through American eyes.

The present, housing-led slowdown in the US would once have written the script for the entire world economy. Today, self-sustaining growth in China and India may mean that the world economy is for the first time in a century decoupling from the forces of American determination.

Is the now commonly argued view that the world is a more dangerous place than at any stage since the Second World War a credible one? Looking at the disaster of Western intervention in Iraq and Afghanistan, the increasingly belligerent noises coming out of Iran, and the growing threat of terrorism around the world, and you might think so. The science of climate change also points to some extreme longer-term outcomes. Yet to the developing world, many of these concerns seem an irrelevance, or worse, the outdated arrogance of already bygone empire.

Even looked at through the rose-tinted spectacles of financial markets, there's plausible cause for thinking that things are more than usually risky.

This is not just for the obvious reason that all periods of economic expansion eventually come to an end, or even that after a prolonged spell of exceptionally cheap and easy money, investors and bankers seem to have dropped their guard and become, in their search for yield, oblivious to risk. It is also because periods of profound economic change, such as the one we are going through, always involve financial crises.

We are now about ready for one of these setbacks. How serious it is depends largely on the Western response. If we chose to shut these changes out, and in crisis to seek security in protectionism, then the long term consequences are likely to prove profoundly negative. Protectionist voices are already strongly influential in US public policy.

Rapid progress in China and India may be a boon to the clinical statistics of world economic growth, but as the price of goods and services homogenise across the world, the effect on many workers in the hitherto privileged West is almost bound to be harmful. There is equally bound to be a political response to this discomfort. There already is in some parts of the world.

As I say, there is good cause to worry. Even so, for me, the consensus, IMF forecasts continue to look about right, at least until the Beijing Olympics in mid-2008, when there is every chance that China will metaphorically collapse exhausted after this glorious showpiece on emerging Chinese supremacy, bringing the present business cycle to a ragged conclusion.

However, this is still quite a long way off, and for the time being the bullishness of financial markets and business leaders seems a more plausible view of the immediate outlook than the warnings of the doomsters. Inflationary pressures again seem close to being brought under control without the need to collapse the economy into recession. More importantly, the structural changes which have been feeding the current, surperchanged spate of world growth show few signs of abating.

This is not just about the Chinese building motorways, factories, dams and power stations. It is also about the tidal wave of entrepreneurial activity being unleashed in the developing world as a result of deregulation, access to finance and the dismantling of barriers to trade. The de-risking of markets through securitisation, syndication and derivatives is good cause for thinking the next big financial crisis will not be as deep or far reaching in its consequences as previous ones. Contrary to much popular thinking, these developments have made the world a safer, not a more dangerous place.

Similarly, the technological revolution which has been driving the outsourcing phenomenon may now be a quite unstoppable force, rendering protectionist measures largely impotent. In the quest for greater efficiency, corporations are focusing ever more closely on core competence, and then outsourcing the rest. It sounds callous, but this is more cause for celebration than lament, for ultimately it leads in a virtuous circle to more wealth creation, more investment and more jobs.

Good times never last for ever. It would be naive to think otherwise. But looked at through the eyes of the developing world, at least, there's even more reason for optimism today than there was a year ago.

j.warner@independent.co.uk

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