Market confidence proves temporary amid anxiety attacks

The markets have recently witnessed exceptional fluctuations in oil and other commodity prices. Equities and currencies have also been volatile. Earlier optimism is repeatedly being questioned by recurring bouts of anxiety. Sharp swings in various asset prices reflect growing doubts as to whether earlier underlying expectations of continued growth and manageable inflation are still sustainable. It seems that it will be very difficult to indefinitely shrug off worsening risks of sovereign debt, inflation and interest rates.

Global growth forecasts have moved higher, but this is primarily due to the acceleration in the BRICs (Brazil, Russia, India and China), and to their rising share of global GDP. In the US, growth forecasts are down, and there are concerns that the outlook for other mature economies may be worsening. Global growth in 2011 is still forecast to be lower than in 2010 and 2012 is expected to be slightly weaker than 2010.

Soft landing

China’s GDP grew 9.7 percent year on year in the first quarter of 2011, which represents a slight fall from 9.8 percent in the previous quarter, but it is still much higher than expected. While such spectacular growth is an unattainable dream for many in the West, Chinese authorities regard the pace of expansion as unsustainable and dangerous, claiming it adds to inflation and heightening threats of bubbles in property and other assets. As Chinese annual inflation has risen to between five and 5.5 percent, monetary policy has also been tightened, through repeated increases in interest rates and banks’ reserve requirements.

Further restrictive measures are very likely. The government wishes China’s growth to slow to seven percent a year over the next five years. But this will be difficult to achieve, as excessive investment and strong exports continue to drive the economy. At the moment, the markets expect a “soft landing” for China, with growth and inflation slowing gradually but still avoiding a nasty crash. However, if inflation accelerates or the economy nosedives, there would be unpleasant consequences, not only for China but also for the global economy.