Say goodbye to the goblin … Sub-prime spook was exaggerated, could vanish by Halloween: Analyst

IT was the “goblin” that wreaked havoc on markets the world over but come Oct 31, investors may be celebrating Halloween for more reasons than one.

The goblin that is the impact of the United States sub-prime mortgage problems could go away as early as then, and growth would return by year-end in time for Christmas, said Mr Ken Fisher, CEO of Fisher Investment.

Saying the sub-prime spook had been exaggerated, Mr Fisher likened it to the scare caused by the Y2K millennium bug and the avian flu warnings, where the perceived risks were greater than the actual threat to the global economy.

“The fact is, if every sub-prime mortgage that could possibly default defaulted, the most it could do is slow down US gross domestic product some,” he told the media on the sidelines of the Forbes Global CEO Conference here yesterday.

“The US economy may slow down, but so what? Because the US is the biggest economy, they tend to think that when the US gets a cold, the world is going to get pneumonia. This, today, is wrong,” said Mr Fisher, a long-running Forbes Magazine columnist with a reputation for accurately forecasting market trends such as the bursting of the dotcom bubble in March 2000.

He could well be proven right again. The International Monetary Fund (IMF) is reportedly raising its world economic growth forecast upwards to 5.3 per cent from the 5.2 per cent it indicated in July.

This is even as it expects the US economy to grow at a slower 1.9 per cent, versus July’s forecast of 2 per cent, according to Financial Times Deutschland, citing unnamed sources.

The IMF expects global growth next year to be 5.2 per cent, and US growth to pick up speed to 2.8 per cent. As for China, the forecast this year has been raised from 11.2 per cent to 11.5 per cent.

With the US’ GDP of US$13 trillion ($19.8 trillion) contributing to only about a third of the US$42 trillion global GDP, the shrinking US economy should actually be led by the performance of the larger non-US economies combined, Mr Fisher said.

Even so, the two economic powerhouses — China and India — would still be affected by a big slowdown in the US economy, said Nobel Laureate Michael Spence, speaking separately on the sidelines of the conference.

But things could be different in 10 years, he added.

“In 1981, when China grew at 9 to 10 per cent, it didn’t make a bit of a difference to the global economy — it was a tiny little economy. Now it is rather large,” said Prof Spence, who won the Nobel Prize in 2001 for economics and is Professor Emeritus of management with the Stanford Graduate School of Business.

The 10 per cent growth enjoyed by China last year is equal to about 2 per cent of the US GDP, and the professor believes that at current exchange rates, the Chinese economy could be worth up to US$4 trillion in the next three to four years.

While the longer term outlook may still be healthy, Mr Tharman Shanmugaratnam, Minister for Education and Second Minister for Finance, warned at a separate event yesterday: “The re-pricing of risk in financial markets is probably not over. There is also increased uncertainty in the near term for the US economy, which could impact the outlook in Asia.”

Speaking at the opening ceremony of a new office for SG Private Banking, he added: “It is too early to say what the economic impact in Asia will be. Should the US economy slow down sharply, Asia will certainly feel the drag.” 
Source : Today – 11 Sept 2007

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