The Hindu Business Line : Looking ahead to 2006

OVERALL, 2005 has been a good year for markets the world over — not only equity but also bonds and commodities. We seem to be sitting on a perfect cusp of good growth, rising corporate profits and low inflation. Thus, rising short-term interest rates have managed to co-exist with low bond yields and booming stock markets — the dream of every Finance Minister and central banker.

Will it be more of the same next year? Mr Alan Greenspan, Chairman of the US Federal Reserve, sheds office in January, to be succeeded by Mr Ben Bernanke. If the risk premium on equities and bonds shrank because of the market's confidence in Mr Greenspan, just his departure could have had an unsettling effect. But there has been no sign of that.

Mr Bernanke's mettle would, of course, be tested only in a crisis. And there are many soft, if not danger, spots in the US and global economy. Foremost among them are high-energy prices (with talk of shortages) and the gargantuan American trade deficit. These should have normally led to rising inflation and a dollar collapse. On the contrary, core inflation (i.e., without counting food and energy) has remained well contained in the sub-2% range. And 2005 turned out to be the best period for the dollar in the last five years. So perfect are the laws of economics!

It is the American consumer who gives economists the creeps. They are afraid that a crash in house prices is on the cards. In their view, the consequences could be catastrophic. It will mean a major pullback in consumer spending with all the ripple effects on the rest of the economy. Job creation in construction (which has been a major breadwinner) will suffer and worsen the employment situation. If these coalesce with falling foreign investment in the US and (therefore) rising bond yields and a falling dollar?

It is the doomsday scenario. Does Mr Bernanke have a contingency plan up his sleeve to deal with this?

But the cry of "wolf" has been heard so long and often that it has lost much credibility.

This column's forecast for 2005 was it could be better than 2004 (as it has largely turned out to be).

What about 2006? Expect a robust global (and Indian) economy, steady to falling energy prices, rising stock markets and higher bond yields on the back of higher inflation. (There is something odd about an yield curve inversion amidst continually rising Fed rates and a strong economy). And no crash landing for the US economy either.

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