Steve Roach writes: “The US and Chinese economies are slowing sharply as 2006 comes to an end. Inasmuch as these two engines have accounted for about two-thirds of the cumulative increase in world GDP over the past five years, this two-engine slowdown can hardly be taken lightly. In my view, it poses major downside risks to the global soft-landing call embedded in liquidity-driven financial markets…..

What I find truly fascinating is that most still cling to the now-discredited notion that US consumers will just keep on spending; this argument further claims that since they haven’t flinched yet, they are unlikely to do so in the months ahead. As I spun around the world last week, I found this view to be the most deeply entrenched pillar of consensus thinking. Yet this premise is not only completely at odds with the weak retail sales of the past two months, but it also ducks a similar impression conveyed by the broader data on personal consumption expenditures. According to our latest estimates, growth in real consumer spending slowed to a 2.5% average annual rate in the final three quarters of 2006 — a significant shortfall from the 3.7% ten-year growth trend. If that’s not a flinch, I don’t know what one is.”