Leading economist warns of instability in global markets

Business Materials 18 November 2007 05:28 (UTC +04:00)

Robert Shiller, Stanley B Resor Professor of Economics, Yale University, yesterday warned that possible speculative bubbles in stock, real estate and oil markets could cause instability in the global economy.

"Perhaps we have gotten a little too confident in the global economic growth," he said on the first day of DIFC Week on Saturday.

"The problem is high oil, stock and real estate prices. There is a question about whether all this can be explained by low interest rates. This is a question that I can't authoritatively answer. But I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets."

"The unwinding of these markets is the most serious risk facing these markets today," he said.

In explaining his comments, he suggested that high oil prices are a concern for the world economy, since prices are at all-time or near all-time highs. He noted that although oil may play a smaller part of the global economy, this diminished impact is overstated, and so high oil prices are still a threat to global growth.

He also warned that stock markets in emerging countries such as China, Brazil and India are up sharply, partly justified by underling growth and earnings, but suggested that the rise is not fully justified by these causes.

"Real estate is another market that's bubbling," Schiller said.

Looking at home prices in the Netherlands, Norway and the United States, he said that historically high prices in these markets in recent years, suggests that "we are entering a new era of real estate speculation that is unprecedented. We are in a period where economic growth appears strong, and it's gotten into our thinking that real estate can only go up, and that it is a remarkable investment."

He noted that futures markets are predicting a 5-10 per cent decline in home prices in the United States over the next year or so. ( Gulf )