Goldilocks is not sleeping in America anymore; she’s now in China

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Remember the fabled Goldilocks economy that we had during the Great Moderation:

A Goldilocks economy is a not too hot or cold economy, sustaining moderate economic growth and a low inflation allowing for a market friendly monetary policy. The name comes from the children’s story The Three Bears. The first use of this phrase is credited to David Shulman of Salomon Brothers who wrote "The Goldilocks Economy: Keeping the Bears at Bay" in March 1992.[1]. The phrase is often mentioned by Larry Kudlow on his CNBC show.

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Oh, the memories. Where did Goldilocks go? She sure isn’t sleeping in America’s bed these days.  According to Morgan Stanley, she’s moved on to China where she will be visiting in 2010.

A Goldilocks Scenario in 2010: Stronger Growth

We expect the Chinese economy to deliver stronger, more balanced growth with muted inflationary pressures in 2010, featuring 10% GDP growth and 2.5% CPI inflation. This baseline forecasts hinge on two key assumptions: i) the strong domestic demand in 2009 is largely sustained; and ii) the recovery in G3 economies remains tepid (see Global Forecast Snapshots: ‘Up’ without ‘Swing’, September 10, 2009).

The tight supply of raw materials and energy inputs has been a significant headwind to rapid expansion of the Chinese economy in recent years. When economies in the rest of the world are also in an expansionary phase of the cycle, any incremental demand from China tends to drive up the global prices of commodities, generating inflationary pressures and making it a challenge to deliver a Goldilocks scenario – a mix of high growth and low inflation.

If, however, the recovery of the rest of the global economy were to remain tepid in 2010, it would help China to benefit from relatively low commodities prices for a reasonably long period of time until the economies of its competitors for the same limited amount of supply of commodities recover. This potentially creates a ‘window of opportunity’ for China to deliver a Goldilocks scenario.

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