Getting used to the 'new mediocre'

Sun Oct 19, 2014 5:04am EDT
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By Mike Peacock

LONDON (Reuters) - Evaporating inflation and slowing growth have put financial markets into such a spin that they could inflict further damage on the world economy.

Until a dramatic selloff, exuberant markets had raced well ahead of the economies that underpin them, partly because the U.S. Federal Reserve and other central banks flooded the financial system with new money.

With the Fed set to turn off its money taps at the end of this month, investors appear to have woken up to poor growth prospects in much of the world, something International Monetary Fund chief Christine Lagarde has termed a "new mediocre".

It's not all doom and gloom. The outlook for the world’s largest economy has not suddenly taken a turn for the worse. And a 25 percent plunge in the price of oil since June should put more money in the pockets of companies and households.

"U.S. momentum has softened a little but we expect growth to remain solidly above trend. At the same time, the drop in oil prices is as much a reflection of supply as demand factors," economists at Goldman Sachs said in a note.

"For consumers in the largest economies, it should provide meaningful relief, offsetting the pressure from tighter financial conditions and weaker global demand."

Fears are centered on recession and even deflation in the euro zone and the extent of China's slowdown.

When the world financial crisis raged from 2007-2009, China's resilience was one of the major silver linings. It may not be this time.   Continued...

A worker operates at a construction site on the 68th storey of a building in Shenyang, Liaoning province, October 16, 2014. REUTERS/Stringer