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Global Finance September 2005
Global Finance September 2005
Date: 19 January 2011, 07:33

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If you read the newspapers, you could be forgiven for thinking the world is an ever more volatile place. Terrorism dominates both the domestic and foreign news pages. Natural disasters such as earthquakes, the Asian tsunami and hurricanes in the United States seemingly occur with ever-greater frequency. And in the economics world, the price of oil continues to hit record highs before dropping almost as suddenly.
But while our perception of volatility has increased—no doubt partly explained by the ubiquity of information in the Internet age—the statistical reality is the exact opposite: The global economy is more stable than it has been for years—despite the shocks of terrorism and ballooning oil prices. Bond and equity market volatility is at historic lows in the US and other major markets.
The nature of the cornerstone of this newfound economic stability will come as a surprise to many. According to Kenneth Broux, financial market economist at Lloyds TSB in London, the global economy is less prone to wild swings because it is enjoying a prolonged and unprecedented period of low inflation. “The main reason that we have economic stability at the moment is that inflation is under control. And the reason for that is China,?Broux says. China in itself is not the cause of stability; indeed, some protectionist US politicians denounce the dislocations it is causing in the domestic job market. But its growing prominence in international trade has created the conditions for stable economic growth.
Manufacturing in the US, the UK and increasingly in continental Europe has, in effect, been outsourced to China and other low-cost economies. “Import costs are much lower [than domestic production], and margins are much higher, hence continuing growth and strong equity market performance,?says Broux. In addition, if developed-world demand is reduced, all that is reduced is imports—not economic growth.
With inflation kept low thanks to increasing volumes of cheap imports, central banks have been able to keep interest rates low, which has resulted in healthy and stable growth. The US economy has been growing at more than 2% for nine quarters, and it looks as if that will continue for the third and fourth quarters of this year. Manufacturing has picked up, and employment is robust. Such a smooth rate of growth is unprecedented in economic history; traditionally, economies grow in fits and starts.

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