As discussed, the consensus outlook for the global economy is that growth will now recover in 1999, and accelerate through to 2000. There are, nevertheless, things that could go seriously wrong with this reassuring assessment. The US economy is now in its ninth year of expansion and is testing long-held records. Buoyant household and investment spending has so far underpinned the economic boom. A soaring equity market has fueled household spending.
Personal savings are at historical lows.
Investment spending seems to have been driven by earnings expectations that far exceed potential productivity growth. These imbalances cannot persist indefinitely. To justify these valuations, future earnings growth will have to outstrip potential GDP growth by a large margin. It has been estimated that if US personal saving were to revert to its historical average, or equity prices were to fall by 20 percent or more as suggested by many valuation models, US growth rates could fall precipitously. An abrupt end to US asset and income growth would then have the potential to disrupt global asset markets and growth.