The US is entering an exciting new phase, with its stock market set to rise 20 percentby Jim O Neill / January 26, 2011 / Leave a comment
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Before looking into the crystal ball for 2011, it is useful to reflect for a moment on 2010.
A year ago, it seemed quite likely that world economic growth would surprise onlookers by being better than anticipated. The economies of the so-called Bric countries (Brazil, Russia, India, China) would be the mainstay of the world recovery. As we look back, this has been the case. I expected that monetary policy would remain very accommodating and that interest rates would be kept low, due to the low risk of inflation. That also has, broadly, proved true. But the outlook was not all rosy. One factor that threatened to throw us off course was the trouble in the euro area—which has lived up to expectations.
German GDP growth has to be regarded as one of the biggest surprises of 2010—and a pleasant one. The German export machine pounded on, while German employment remained strong, and there were increasing signs of a more rounded kind of economic expansion, which included robust domestic demand.
In the US, it was not surprising that the economy ended the year strongly. However, it remains something of an mystery as to why the economy suddenly lost its momentum in the period running from the spring through to the summer.
In the rest of the world, the Bric economies and other large growth economies generally delivered as expected. The surprise was the breadth of the expansion elsewhere, such as in Indonesia and Turkey.
In financial markets, there were three big themes for which 2010 will be remembered. The first was quantitative easing (QE), which is the creation of new money by the central bank and its introduction into the financial system, with the aim of boosting the money supply and stimulating growth. The consequences of QE are unknown.
The second was the threat and, in some cases, the reality of excessive government control of capital flows in and out of economies, not least in Asia, where governments have kept a tight grip on exchange rates. China is the most significant example.
The third, of course, was the mess in Europe. Most attention has been focused on the ability of debtor nations to manage their respective burdens. In my opinion, however, the European crisis remains one of structure and governance
THE US: I…