The latest official US GDP data did not provide any surprises. They depicted a weak economy that barely held its head above water. To reiterate the main features, consumption slowed and investment fell. But exports were fairly strong and there was a build-up in business inventories. The export picture was the real rosy part of the report.

You don't have to be a believer in the decoupling thesis to note that a global economy that is growing faster than the US, along with a weak dollar, is likely to juice up exports from the US. Also, the lower pace of growth in America relative to the world has the beneficial effect of reducing the large current account deficit that has previously so troubled the dollar's fortunes

Currently, the greenback is enjoying a rebound from somewhat over-sold levels, particularly against some European currencies. This must come as something of a relief for Eurozone companies and governments, many of which have been complaining loudly about the appreciation of the euro. There has always been a feeling in Europe that their currencies have had to bear the brunt of the adjustment, as investors dumped the greenback.

A case can be made that Asian currencies need to appreciate further against the dollar. But it is not clear that governments in Asia have given up their tendency to manipulate exchange rates. As for the Japanese currency, it is again showing signs of weakness. The return of greater risk appetite and a bounce in stock markets means that the carry trade has comes back into play.

It is not clear that US policymakers really do want a stronger currency at this point in time. The domestic economy is demonstrably weak and it needs all the help it can get from the export side. Meanwhile, there is growing protectionist sentiment in the US as the economy slows down and the job market deteriorates. If the slowdown deepens, there will be even greater pressure on politicians to protect the domestic market and employment levels.

Of course, there is no unanimity on the issue. Upper-income folks, benefitting from globalisation, are against protectionism, while those in the lower echelons, whose jobs are threatened by imports and outsourcing to foreign countries are roundly against. But American consumers in all income classes have for years been enjoying high-quality imported goods at knock-down prices, principally from Asia. And they got cheap vendor financing to boot.

In this scheme, the Asians played the role of producer/saver, while Americans did their bit as consumer/borrower. As consumer-of-last-resort, they provided sufficient spending power to keep growth humming in Asian countries that suffered from weak domestic demand.

But this led, subsequently, to significant imbalances in the global economy that still needs to be corrected. And it should be noted that the results didn't come about as a consequence of the working out of pure market forces. Policymakers were significantly involved. Asian authorities kept exchange rates artificially depressed. Meanwhile, Greenspan, the grand bubble-meister at the Fed, kept interest rates exceptionally low. And the Asians cooperated by gobbling up fixed-income securities that offered very low yields.

What is needed now is for Asians to become committed spenders and for Americans to save more. Well, this isn't going to happen quickly or painlessly, not least because officials keep on interfering with market forces via monetary and exchange rate policies.

US house prices continue to fall and there is no bottom in sight yet. And the pain suffered by homeowners is pretty widespread. The super-speculative real-estate markets such as Miami and Las Vegas have come down with a thud, but the decline in the house prices is generalised and affects most areas. Those who bought late in the bubble period are hurting really badly.

Meanwhile, energy and food prices continue to put pressure on disposable income. A head-in-the-clouds academic economist such as Bernanke may prefer to concentrate on core inflation on the dubious assumption that the excluded components are erratic. However, the average consumer in the real world doesn't have the luxury of paying only core prices.

A notable feature of the recent GDP report was an increase in business inventories. It seems likely that this represents unintended accumulation. In a slow sales-growth period businesses are prone to keep inventories lean, not to increase them intentionally. Consequently, production may have to be cut, to allow a reduction of the accumulated stockpiles. Also, the job market remains weak and this argues for softness in the economy in the second quarter as well.

American consumers have been famously resilient over the past decade, but they haven't been tested by really tough conditions until recently, with the bursting of the housing bubble, weaker employment conditions and high energy and food prices. If these conditions prove to be short-lived, households will tend to regard them as temporary and aberrant, resulting in an eventual rebound of consumption growth. However, the longer these conditions persist the more likely it is that households may revise their views of what is "normal", and we will end up with a higher savings rate and lower consumption growth than previously.

The Eurozone economy is reasonably resilient to the downturn in the United States, but obviously not immune. Just ask some of the big exporters. At the same time, many of the major exporting companies are diversified geographically, hedge their dollar exposure and sometimes invoice in euros, even outside the Eurozone, as the currency gains international acceptance.

Two good things going for the economy are that it has avoided a big slump in property prices, and the effects of the credit crunch have been curbed. Yes, there is Spain and a couple of other areas that are experiencing a bust in real estate values, but the region as a whole is not facing the sort of correction that is occurring in the United States.

The other positive factor is that the credit crunch has had a more limited impact than in the US, even though many European banks have suffered from exposure to the sub-prime debacle across the Atlantic. Some of the sentiment indices have been a bit wobbly but, by and large, consumers are better placed than their American counterparts to maintain spending levels. As for the UK, economic prospects are gloomier because of the impact of the housing correction and the weak state of household finances.

It should be noted that for reasons of structural rigidity, inflation tends to be stickier in the Eurozone than it is in the more flexible US economy. So the European Central Bank's vigilance on this issue is understandable. And, of course, the ECB's brief is much more focused on fighting inflation than promoting growth. As the current inflation rate is above their target rate, it is likely that they will be slow in cutting interest rates.

Another major economy that has even more serious inflation problems is China. Inflation is rising at the fastest rate in a decade, boosted by soaring food prices. At the same time, the economy has yet to slow down from its heady pace of growth. The high inflation rate is troubling the authorities because it hits lower-income groups the hardest and may occasion political unrest.

The central bank has raised the reserve requirement for banks in order to rein in lending. But their intention is to periodically increase the ratio by small increments. The baby-step approach is in accord with the government's goal of cooling an overheated economy, but still keeping growth humming at a high rate. However, the inflation problem may require a more aggressive approach.

Two other means that can be used in this regard are interest-rate hikes and currency appreciation. But authorities appear to be reluctant to use the interest-rate tool because they are not keen on attracting money inflows from abroad. As for currency appreciation, a substantial change in the peg does not appear to be in the cards.

They have allowed a speed-up in the pace of appreciation. But it seems unlikely that they will allow a sharp acceleration to take place. For one thing, the authorities may be betting on a slowdown in Europe and the US, which would reduce exports. They don't want to compound the problem for exporters by reducing their competitiveness via currency appreciation.

Over in the land of the rising sun, the Bank of Japan is gloomier about the economic outlook, cutting its growth rate for this fiscal year to 1.5 percent from 2.1. And the data prints on the economy seem to support this view. Industrial production is down and business sentiment is falling. Also, jobs are becoming scarcer and consumer gloom has yet to lift, which means that households are in no mood to increase spending.

With input prices on the rise and sales growth becoming more difficult, corporate profit margins are feeling the pinch. Exports remain a main engine of growth for the Japanese economy and the effects of a global slowdown will certainly be felt in Japan.

Inflation has been rising sharply, which is also a negative factor for consumers. Stagnant wages and rising prices don't provide an incentive to increase spending. Over the past few years, many observers have been hoping that deflation would turn into inflation in Japan. Now that it has arrived, its presence is not being celebrated. This is because it is being driven by the supply-side factor of rising input prices, not by an increase in final demand.

The Bank of Japan, which has been on watch to normalise interest rates once inflation picks up is reluctant to do so, given the backdrop of an uncertain global economic outlook. Also, the current balance of factors means that an inflation spiral in Japan is unlikely. So the BoJ will maintain its very low interest rates for now, with the consequence of encouraging the carry trade, as soon as global risk appetite begins to increase.

The Japanese stock market remains cheap, in terms of its own history and in comparison with the world index. But it hasn't attracted a surge of interest. Foreigners have been the main players in the Japanese market for the past few years and long-term investors haven't been able to make much in the way of returns. Many have given up making money in this market and have departed for sunnier climes. Currently, Japanese stocks are showing pretty much the same kind of momentum as the world index. However, when global growth starts to pick up, the Japanese market is likely to outperform handsomely.

There is a lot of positive talk coming from Wall Street bosses that the end of the credit crunch is in sight. They are being joined in the chorus by a couple of central bankers and the Treasury Secretary. None of them has volunteered to take a lie test. To gauge their record on veracity just check their statements over the past year and square it with the evidence. Of course, there is also another possibility. They don't intend to make misleading statements, but are simply ignorant.

As for us, humbler folk, we don't know whether the credit crunch is coming to an end soon. There is a lot of opacity involved. We do note that risk appetite is increasing, stock markets are rallying and high-yield is outperforming Treasuries.

Earnings reports from US companies have been rather better than expected, even in the face of downwardly-revised estimates. A notable and not unexpected feature is the extent to which exposure to foreign markets and non-US currencies generated favourable results. This trend can only be maintained if global growth does not wane.

The Fed's (i.e. the taxpayer's) largesse in shoring up Wall Street's tottering institutions and rescuing Bear Stearns from bankruptcy has let the moral-hazard genie out of the bottle. The central bank is already being hectored by a number of politicians to fund the student loan market by swapping Treasuries for bonds backed by student loans.

In the future, there are going to be demands from this or that industry or corporation to be bailed out — backed by the appropriate politicians. Why would their demands be illegitimate? They may also state that their bankruptcy will pose systemic risk, which was the Fed's justification for saving Bear.

We know that there will be an increase in regulation in the next few years, intended to prevent a repeat of the credit-crunch crisis. Wall Street will, of course, fight to water it down as much as possible. But at the end of the day, whatever regulations come into force, they will find innovative ways to get around them.

And, most importantly, they will be ready again to take on big risks, knowing that the Fed's safety net will always be there if they slip and fall.

Here's the blurb.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com