The IMF's recent forecast for global growth this year suggested a soft landing for the world economy as growth subsides a little from 5% to 4.3%. But it reckoned that financial market conditions would tighten and global imbalances had deepened, increasing vulnerability to shocks. But it seemed relatively sanguine about the prospects of a gradual adjustment to tighter credit and higher costs.
I cannot be so optimistic. Global liquidity is tightening and risk appetite for global financial assets is set to fall. Disinflation (particularly in the US) is at an end and interest rates are on the rise. That will start to destroy wealth.
The first stage will be in the financial assets of those emerging markets that are most dependent on commodity and energy imports and on foreign capital, such as the Philippines and Turkey. Rising real interest rates are also going to burst the Anglo-Saxon property bubble. Further on, high commodity prices and rising interest rates will eventually slow growth. Then those economies that depend heavily on commodity exports, such as Russia, will suffer. So will resource-based economies such as Australia. And there is a significant danger of a financial sector bust in over-indebted economies such as the US.