Evaporating inflation and slowing growth have put financial markets into such a spin that they could inflict further damage on the world economy according to the latest financial reports issued over the weekend.

Until a dramatic selloff, exuberant markets had raced well ahead of the economies that underpin them, partly because the US Federal Reserve and other central banks flooded the financial system with new money.

With the Fed set to turn off its money taps at the end of this month, investors appear to have woken up to poor growth prospects in much of the world, something International Monetary Fund chief Christine Lagarde has termed a “new mediocre”.

It’s not all doom and gloom. The outlook for the world’s largest economy has not suddenly taken a turn for the worse.

And a 25 per cent plunge in the price of oil since June should put more money in the pockets of companies and households.

“US momentum has softened a little but we expect growth to remain solidly above trend. At the same time, the drop in oil prices is as much a reflection of supply as demand factors,” economists at Goldman Sachs said in a note.

“For consumers in the largest economies, it should provide meaningful relief, offsetting the pressure from tighter financial conditions and weaker global demand.”

Fears are centred on recession and even deflation in the eurozone and the extent of China’s slowdown.

When the world financial crisis raged from 2007-2009, China’s resilience was one of the major silver linings. It may not be this time. Chinese third-quarter gross domestic product numbers due tomorrow are forecast to show growth at its weakest pace in more than five years, at 7.2 per cent year-on-year. Beijing is expected to roll out a stream of stimulus measures in coming months, though most economists believe it will hold off on an interest rate cut unless conditions deteriorate sharply.

A poor run of economic data suggests Germany will flirt with recession in the third quarter, having contracted by 0.2 per cent in the second. Flash October purchasing managers indices for the United States, eurozone, Germany and France – due on Thursday – will give a first glimpse of th­e state of their economies heading into the last quarter of the year.

Britain won’t escape the impact of the eurozone’s malaise but is in much healthier shape. Third-quarter GDP data on Friday are forecast to show growth of 0.7 per cent in July to September.

The International Monetary Fund, United States, G20 and European Central Bank have pressured Berlin to increase public spending to lift its own economy and help its peers in the currency area.

But the German government, the only one in the eurozone with the resources to spend more and the heft for it to make a difference, is committed to a balanced budget with no net new borrowing in 2015.

The argument will doubtless be reprised at an EU leaders summit in Brussels later this week.

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