The global boom seems set to continue in 2006, which means Australia’s
resource boom will continue also. There
are risks, to be sure, but overall it’s not clear that the risks are
rising. Indeed, there’s the prospect
that the world economy is in a “sweet spot” and that slower growth in, say, the
USA and China might be offset by faster growth in Japan and (more surprisingly)
in Euroland.

The key to continued global boom is that various
“imbalances” remain under control. Inflation is the most general imbalance, and rising inflation has
brought other global boom-times to an abrupt end. Asset price inflation is also a major imbalance with the potential for a
sharp reversal to induce recession.

In 2005 share and commodity prices continued to rise in most
countries – the US
being a conspicuous exception. Japan showed a
strong recovery last year while Euroland also showed great strength.
Development in Europe will bear careful
scrutiny as stronger growth there would add to the overall inflationary risk.

China has been, with the USA, a major engine for global
growth, with India having an especially strong effect in raising the demand for
raw materials, and most experts predict continued strong Chinese growth for the
foreseeable future, with perhaps some slowing.

My money is on only a slight slowing of growth in both the USA and China. With Europe and (especially) Japan (along
with India, Russia and several countries in Latin America) growing faster the
chances are strong for continued rises from already high levels in the prices of
oil, gold and other important commodities.

Another point for debate concerns the likely path of global
interest rates. Those in the strong US
slowdown school will be more inclined to see stability in interest rates or
even falls from current levels, but these are not in our view high probability
outcomes. Currencies will remain volatile, representing as they do a
set of relatively free and highly liquid markets that often act as the safety
valve for volatile expectations.

The wild cards for 2006 are not unlike those that threatened
prosperity in 2005. Bird flu, major
terrorist attacks, the resurgence of global inflation, big drops in commodity
prices, a crisis in the Chinese economy are all examples of low probability
events that could derail the generally positive outlook. The rumours that the US may be poised to attack Iran are
particularly disturbing.

We must hope for the best but be cautious in our investment
strategies in case one or more of the potential negative shocks occurs in 2006.

Read PD Jonson’s full in-depth analysis here.

Peter Fray

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