Monetary conditions continue to sustain growth

G Chandrashekhar

Outlook

Energy prices

have plunged recently and financial conditions have turned much more supportive.

Unabated demand

growth and very little spare capacity in energy is likely to lead to recovery in oil prices.

Mumbai, Sept. 28

Higher energy prices, tighter monetary policy in the US and Europe as also downturn in the US housing market have all combined to cast a shadow on global economic growth. There may be widespread pessimism over growth prospects; but Barclays Capital Global Outlook published on Wednesday maintains an optimistic view over the global near-term growth outlook.

Although there has been a modest slowdown, especially in the first half of the year, global monetary conditions continue to sustain growth as reflected in still abundant liquidity expansion, it is argued.

Global growth

In addition, energy prices have plunged recently and financial conditions lower bond yields and higher stock prices have turned much more supportive for growth, Barclays said, adding that the fundamental drivers of housing demand (in the US, household income growth and mortgage rates) remain constructive and home sales could stabilise in the coming months.

"In view of such considerations, we expect the overall economy to exhibit surprising resilience over the next few months and return to above growth trend," the report asserted.

Global growth is expected to slowdown from 5.1 per cent this year to 4.7 per cent next year; but this should be seen as part of natural ups and downs of the global expansion and not a cause for concern, Barclays reasoned.

Recovery likely

Placing commodity markets in the context of this optimistic outlook, there is the strong possibility that energy (whose correction is somewhat overdone) and selectively some commodities will begin to recover. The current correction phase is an opportunity to increase exposure to energy and select commodities.

Unabated demand growth and very little spare capacity in energy is likely to lead to recovery in oil prices in the last quarter, which in turn would be positive for base metals in general.

On the other hand, gold's fundamentals have become more negative, although one could expect some modest upside for the yellow metal in Q4, largely on somewhat weaker dollar.

(This article was published in the Business Line print edition dated September 29, 2006)
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