DIFC Economic Forum looks into global macroeconomic outlook 2008

Shiller based his warning based on recent trends in oil prices and the US and international stock and real estate markets. Each of these areas, according to him, reveals speculative pressures indicating financial bubbles. If the pressures and instability continue to build, the global economy could enter another major recession.

The global economy has been enjoying good growth rates since 2001, thanks mainly to record growth in emerging markets. Global growth has recently begun to slow, however. One reason for this is oil prices, which - even controlling for the effect of the devaluation of the US$ -- are almost at record levels. Energy goods play a less important part in personal consumption than in the past. But we should not overstate this factor; oil price increases still come through to affect consumer spending and global growth.

"Perhaps we have gotten a little too confident in the global economic growth. The problem is high oil, stock and real estate prices. There is a question about whether all this can be explained by low interest rates. This is a question that I can't authoritatively answer. But I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets," said Shiller.

Stock markets in China, Brazil and India are also up dramatically. Increased earnings in the three countries can only partly explain the trends, according to Shiller. A more important contributor is speculative pressures, building up to create what look like stock bubbles.

To date, the tremendous volatility in the US stock market has not brought major downward corrections in stock prices. Individual and institutional investors alike are increasingly losing confidence, however, according to measures taken by the Yale School of Management Stock Market Crash Confidence Index and its Market Valuation Confidence Index.

Shiller compared long term real home prices in the Netherlands, Norway and the United States to demonstrate that the world has entered an unprecedented new era of real estate speculation. The great danger, according to him, is that people believe that real estate prices can only go up. Yet a variety of measures show that the boom in home prices is turning. Most strikingly, futures markets such as that of the CME in Chicago now predict an ongoing, major decline in home prices through 2011.

Nobody disputed the trends data presented by Professor Shiller in the discussion that followed his speech. For a number of participants, however, this data focused too much on the United States, without sufficiently recognizing that growth in Europe and emerging countries is likely to pick up the slack developing in US economic growth.

Shiller's fellow panelist, Eric Vergnaud, the Head of OECD Research at BNP Paribas, was among those who predicted a soft landing for the global economy. For BNP Paribus analysts, an important factor is that the American economy is more robust than Shiller indicated.
Buoyed by emerging economies, global economic growth is expected to continue to be strong. Meanwhile institutional growth supports such as US hedge funds are still healthy. The devaluation of the US$ should also contribute positively. The likely outcome for 2008 is thus a slowing of growth, but not recession.

The view was also more optimistic among participants who took part in the live polling in the session. Their risk estimate for a black swan, unknown unknown event, was 2.8 on a scale of 1 to 4, while they rated the likelihood of a recession in the US at 2.5 out of 4. Yet for 51% of those polled, emerging markets have decoupled from those of the developed world. For many in this audience, it is thus possible to be
gloomy about the global economy while remaining optimistic about emerging markets.