Two for the Road

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It sounds like a recipe for economic disaster: Oil rpices soared while central banks around the world hiked interest rates. But last year the global economy carried that extra weight and continued to move ahead robustly. The combination of big-spending U.S. consumers and booming Chinese production that feeds the Western appetite for low-priced products resulted in a second consecutive year of worldwide growth of more than 4%. That's the strongest in three decades, and there's more good news to come: the world economy is on track to enjoy another bumper year in 2006 as the twin Chinese-American engine continues to power ahead.

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The upbeat forecast--albeit with some significant caveats--emerged from a lively discussion of TIME's Board of Economists at the World Economic Forum in Davos, Switzerland. "The outlook is for another Goldilocks kind of year," is how Laura D'Andrea Tyson, dean of the London Business School and a former White House economist, summed it up.

In the U.S., the economy is expected to slow somewhat yet still expand more than 3%. But pencil in China for another year of scorching 9% growth. There are encouraging signs of vitality even in Japan and Germany, the world's second and third largest economies, which have struggled for years to break out of their torpor.

Lurking in the background, however, are the usual suspects, threats as familiar and ominous as the Three Bears. The worldwide supply of oil can barely keep pace with the huge surge in demand that has been driving up prices to more than $60 per bbl.--which puts supply at the mercy of politically fickle energy producers like Russia and Iran. "We will have some shocks because supply is so tight," warned Zhu Min, executive assistant president of the Bank of China. He also expects a surge in volatility in financial markets this year and, like the other panelists, worries about how successfully the untested new chairman of the U.S. Federal Reserve, Ben Bernanke, will deal with unforeseen problems.

Most worried of all is Stephen Roach, chief economist at U.S. investment bank Morgan Stanley, who for several years has warned that the U.S.'s borrowing and consumption binge will come to a bad end, with consequences that include a likely fall in the value of the dollar. (And this bear doesn't cry wolf--Roach was right in predicting the dotcom crash.) The problems will not have gone away even if the dollar remains buoyant, he said, warning of a "dangerous degree of complacency" among investors. "The weakest link in the global-growth chain in 2006 is the most important link, and that is the American consumer," Roach cautioned.

If the global economy does continue to hum along, it will partly be by accident. What is conspicuously absent, the economists agreed, is a constructive dialogue between policymakers in China and the U.S. that would put the two nations' increasingly interdependent economic relationship on a more balanced footing. In that scenario, the U.S. would curb consumption and start saving more, while the Chinese--who have been buying hundreds of billions of dollars of U.S. securities, especially U.S. Treasury bonds--would save less and do more to boost their domestic demand. That would go a long way toward reducing the U.S.'s $800 billion current account deficit without harming world economic growth.