In Germany and Japan, erstwhile economic powerhouses that seemed finally to be breaking out of a long torpor, business sentiment, industrial output and exports have turned down.

Seemingly insatiable demand from China and the rest of Asia, which a month ago seemed certain to drive oil and commodity prices still higher, has suddenly given way to anxiety about a global raw materials glut. Yet stock markets hit new five-year highs last week and the Dow Jones industrial average, the most famous, if not most representative, indicator of financial sentiment, is near a record.

Is there contradiction between rising optimism in stock markets and the gloom that appears to be spreading in the consumer and business worlds?

The answer is “Not at all”. A slowdown in global growth and industrial production, triggered by weakening in American housing and consumption, is just what the doctor ordered for the world economy. This sequence of events promises to create an almost ideal financial environment in the year or two ahead, particularly for the American, British and Asian economies. What seems to lie ahead is exactly the “Goldilocks economy” — with growth neither too hot nor too cold — that financiers around the world have been dreaming of. In short, the US Federal Reserve Board appears to have managed once again to fine-tune the growth of the US and world economies with uncanny precision.

Back in June, when Ben Bernanke, the Fed’s new Chairman, raised interest rates one last time, to 5.25 per cent, and then effectively declared that there would be no further changes in US monetary policy for the foreseeable future, he seemed to be making a risky bet. Although it seemed more probable than not that the Fed would prove right in expecting a gradual slowdown in growth and an easing of inflationary pressure, there were very serious risks to this forecast on both the upside and the downside. On the downside were widespread fears that a falling property market would so shock consumers that it would tip the economy into outright recession. On the other hand, it seemed quite likely that inflation would continue to accelerate, since the very moderate slowdown that the Fed was trying to manage would not suffice to reverse the momentum of price increases driven by oil and commodity speculation, as well as by the steady build-up of demand in the recent exceptionally fast global growth.

In the past few weeks, however, both risks appear to have largely vanished. The US housing market has sharply declined, as expected, but dire effects on the wider economy have so far failed to materialise. Construction activity has fallen sharply, with new home sales 30 per cent down since a peak nine months ago and decline still gaining pace. However, effects on employment and general economic activity have so far been muted. While the share of housing in US GDP will certainly fall sharply from 2005’s clearly unsustainable ratio of 6.5 per cent, several offsetting factors, such as the boom in corporate investment and gradual improvement in US net exports, now seem likely to keep the economy growing in the year ahead at a perfectly respectable pace.

The main argument backed by bears of the American economy, however, has not been about the collapse of housing investment per se, but about the potential impact of falling house prices on US consumers, who have been borrowing against their homes to finance an alleged consumption binge.

This concern, too, seems to be going. Last month US statistics recorded the first year-on-year fall in prices of existing homes since the mid-1990s, but, despite this evidence that the housing bubble is now bursting, consumers have not panicked. In fact, US consumer confidence has risen sharply in the past two months and retail sales have stayed surprisingly robust.

American consumers’ sanguine conduct can probably be explained by two factors. The first is that the boom in housing was never really a “bubble” in the very speculative and destabilising sense thought by many bears. House prices in the past year or two were certainly rising unsustainably, but this rapid inflation came after many years of house prices lagging behind other assets and failing to reflect huge improvement in economic fundamentals, such as lower interest, financial deregulation and rapid population growth. An IMF study this year compared the United States’s housing boom with booms in other countries and assessed the extent to which rising prices reflected economic fundamentals. Results indicated that house price inflation actually was far more moderate in America than in other advanced economies that have managed soft landings of their housing markets, such as Britain, Ireland and Sweden. The study suggested that house prices in all these countries were only a tenth higher than appeared to be justified by structural economic changes.

The second explanation for America’s unexpected resilience amid a house price bust is the fall in energy prices since late summer. Benefits of cheaper oil and gas, for both consumer psychology and real incomes, have largely offset worry about falling house prices. That brings us back to the case for optimism about the world economy, and especially global stock markets, in the year or two ahead.

Oil prices’ 25 per cent fall since a peak in summer has not only lifted consumer confidence and real incomes, but helped to tame inflation. So, the inflationary risk to Ben Bernanke’s big gamble on a “Goldilocks economy” is removed at a stroke. If oil prices keep falling, or stay at present levels, there will be far less risk of central banks having to raise interest next year, when consumers will still be under pressure from a property slump. Because of the fall in oil prices, therefore, the US and world economies will enjoy a double benefit — real incomes and consumer confidence will be boosted and central banks will have more freedom to cut interest if needed to sustain demand.

The sudden optimism in financial markets is, therefore, not surprising. Events in Lebanon seem to have shown even the White House and Israel that they have no military option for tackling Iran, weakening the geopolitical case for an oil-price premium. Gradual slowing in the world economy has cut oil demand and supplies seem to have been spared hurricane disruption. Perhaps it is quite reasonable, therefore, that stock market investors are becoming increasingly bullish as they look forward to a nice, moderate slowdown — the Goldilocks economy of 2007.

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