Global growth vulnerable to market tension ?

what effect does this have long term and short ?


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Despite a flourishing US economy, global momentum remains vulnerable to financial market tension that could dampen critical consumer spending and bedevil the corporate and housing sectors, analysts warn.











While the US government on Wednesday reported a surprisingly robust 3.9 percent gain in third quarter US growth, Veronique Riches-Flores, chief economist with the bank Societe Generale, put that in perspective.











"The third quarter will be good everywhere, including in the eurozone," she cautioned.











She predicted however that "we are in for two to three quarters of negative effects" showing up in the financial results of major banks. Several of them have already disclosed big losses stemming from a collapse in the US high-risk housing market and its impact on mortgage-backed securities.











The US Federal Reserve has put the cost of the crisis in the "subprime" mortgage sector at between 100 and 150 billion dollars (69.2 billion-103 billion euros) to banks and credit institutions worldwide.











But beyond simple bottom-line losses, "the crisis in the credit market persists, with tighter lending conditions, a weakening in other segments of the economy and a rise in US unemployment," said one banking analyst who asked not to be named.











Borrowiong costs among banks are still abnormally high, a sign that jitters continue to sap confidence at financial institutions.











As a result, according to Riches-Flores, companies are having trouble securing financing, both in the United States and Europe.











A downturn in US housing prices has also signalled an end to the "wealth effect", which in the past few years has enabled homeowners to re-finance their properties in order to obtain ready cash.











With that option now disappearing, US consumer spending, which drives US growth, could contract.











The US labour market has so far generally resisted the slide in the housing sector, although there have lately been increases in the number of first-time applicants for unemployment compensation.











In Europe, "the effects of the subprime crisis are expected to materialise gradually," said Eric Vergnaud, an economist at the BNP Paribas bank.











At research group Exane, analyst Jean-Pierre Petit, also noted that "the cost (to Europe) will be progressive" and said there would be no serious damage done if "the equities market rebounds and if the credit market returns to normal."











He forecast that the global credit squeeze would shave 0.3 to 0.6 points from the world economy between mid-2007 and mid-2008. The International Monetary Fund last month reduced its growth projection for 2008 to 4.8 percent from 5.2 percent.











Petit also cited certain positive effects from the current situation, notably lower US interest rates, a delay in rate hikes in the eurozone and oil prices "that would be even higher without the crisis."











In addition, tighter credit conditions had "put an end to the pursuit of speculative bubbles" and could thereby ensure a soft landing for the global growth pace after a five-year spurt.

Global growth vulnerable to market tension ?
The short run effects are clear. Savers are putting less money into banks and real estate, and banks have been unwilling to lend to subprime customers. This will create a slowdown in the real estate market, and perhaps the stock market will also decline temporarily.





The longer-term implications are harder to understand. If you believe that the sub-prime market was not sustainable, and those individuals should not have been buying houses, then this will create a permanently lower demand for housing. If you believe otherwise, then the market might figure out a better way of handling the risks.

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