by Calculated Risk on 8/16/2007 10:44:00 PM

From the WSJ: Markets Fear U.S. Woes Will Hit Global Growth

"Today is the first day that markets are asking questions as to whether global growth is going to be significantly affected," said Jim O'Neill, head of global economic research at Goldman Sachs. "Today feels quite scary, frankly."

It was only three weeks ago that the International Monetary Fund raised its outlook for global economic growth this year and next. While the IMF acknowledged that U.S. growth would fall short of its earlier forecasts, it predicted that fast-rising China and India, helped by a cyclical upswing in Japan and Europe, would more than pick up the slack.

The scenario that worries investors around the world starts with a U.S. slowdown set off by lower housing prices and tougher lending standards. That would lead the U.S. to import fewer computers, cars and sneakers, hurting big exporters such as China and South Korea.

Those countries have been big buyers of commodities, driving up the prices of oil and metals. If they eased back, that would hurt big commodity producers such as Brazil and put some large, risky commodity ventures around the world at risk.

Mohamed El-Erian, head of the company that invests Harvard University's $29 billion endowment, believes the more-optimistic picture of global growth still has merit -- as long as the U.S. economic slowdown is gradual and doesn't result in a recession. "The next few weeks will be a test of this thesis," he said.

This is a key question. I started the year arguing that housing would lead to a U.S. slowdown, and also a lower trade deficit as imports slowed, eventually slowing growth in exporting companies, and leading to a global slowdown. I'll have more on this possibility tomorrow.