Bill Emmott - International Author & Adviser

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Here is the world forecast: plenty of sunshine
The Times - August 22nd 2011

Here is some news that might brighten up this gloomy August: the world economy is not about to enter a new recession. The main reason for this bold, nay reckless, forecast might not seem so cheering to Europeans and Americans, although it should be: it is that we are no longer "the world", whether in economics or politics. Looked at from China, India, Brazil or indeed South Africa, the economic prospects still look pretty good. The current global growth rate of 4% or so hardly qualifies as a slump.

            If the four years since the western credit crunch began have taught us anything, it is that financial systems are vulnerable to hidden time-bombs, or to swings of psychology that end up bringing down banks, so things can certainly go wrong. This month, markets have been preoccupied with possibilities of a second dip into western recession, or trouble in a European bank laden down with dud sovereign debt, or the emulation by America and Europe of Japan´s deflationary stagnation of the 1990s. But let us, for a moment, look at the sunshine, not the clouds. Let us look for things that could go right.

            They begin in Asia, surprisingly with a Chinese and Indian slowdown. It is those giants´ rapid growth, both achieving more than 10% in 2010, that has kept the world humming, but they have also pushed up inflation, thanks to their urbanising, industrialising, demand for oil, copper, food and other commodities. Given our sagging demand and high unemployment, neither Europe nor America would have seen inflation at 2-5% a year had it not been for Asian boom.

            Inflation in China (6.5% in the latest month), India (8.6%) and Brazil (6.9%) has been one of the things that could have gone wrong, either by causing a local economic crisis or political unrest. The good news is that no crisis or "hard landing" has occurred in any of those big countries despite six-to-nine months of credit tightening, but instead growth is easing towards still impressive but less inflationary levels.

Political unrest is always possible, as India´s anti-corruption protests and China´s riots in separatist, mainly Muslim Xinjiang and elsewhere have recently shown. But in neither does it look anywhere near approaching Syrian or even Egyptian dimensions.

In political terms, rapid growth in Asia is often seen as bad for Europe and America, for it makes us feel that we are history, and it is dismissed as economically irrelevant to the West because China has a big trade surplus and doesn´t import much. Neither is true—if we decline, it will be thanks to our own weakness and mistakes, not China´s new wealth, and that country is actually the world´s second biggest importer, after the United States—but in any case China´s response to inflation and its fear of unrest promises to boost its imports.

To stave off discontent, wages are being allowed to rise rapidly, which will raise consumption. And to help control inflation, China´s currency, the renminbi, is being revalued, albeit gradually, against both the dollar and the euro. Economic growth is slowing to about 8-9% a year, a healthier and more sustainable rate.

Another thing that could go right in Asia is a Japanese rebound. The world´s third-largest economy (and fourth-largest importer) has had three quarters of contraction, especially because of the deadly tsunami that it suffered in March, but has now begun to surprise economists on the upside, not the down. With reconstruction spending getting under way there is likely to be a sharp recovery during the rest of this year.

The rise of the yen during last week´s market havoc will hurt Japanese exporters, but as Nomura Securities, the country´s biggest investment bank, points out, once you adjust for deflation, the currency is close to its historical average level, rather than at the exceptional heights that bare numbers imply. If the renminbi continues to rise in value, that will help Japanese exporters too, for China is now their biggest market.

The best general news for the West would be for global energy and commodity prices to drop. High household debts and stubbornly high unemployment mean that consumer spending is not going to be buoyant in Britain or America for a long time to come, but inflation has acted as a further tax on consumers. From its nasty June peak of $120 per barrel, the Brent crude oil price has already fallen by 10%. Slowing demand should have pushed the price down further, but politics—namely the conflicts in Libya and  Syria—have held it up.

Those political factors are inherently unpredictable, and as Iraq has shown since the 2003 invasion, it can take a long time to repair and restart oil and gas production once it has been disrupted. Nevertheless, the fall of the Qaddafi regime in Libya and, even more so, the less-imminent-looking demise of the Assad regime in Syria would surely change the mood of oil traders, at least in the short term. Forecasting the oil price is a mug´s game, but in this search for sunshine it does have the potential to give western economies a nice fillip.

On the face of it, a drop in inflation in Europe and America could be interpreted as another step in the Japanese direction of deflationary stagnation, which is what British, American and German government-bond markets seem to have been warning of this past fortnight. Yet, as Nomura Securities also points out—and being Japanese, they ought to know—there are some crucial differences between Japan in the 1990s and America now.

One is that American banks owned up to their troubles quickly in 2008-10 and recapitalised themselves quickly too, avoiding the Japanese error of denial (which Europeans are closer to emulating, alas). Another is that while the Bank of Japan was mistakenly slow and reluctant about printing money to keep the economy afloat, the Federal Reserve has shown no such reticence.

Next weekend, at the central bankers´ annual get-together in Jackson Hole, Wyoming, Ben Bernanke, the Fed´s chairman, is likely to say that he is quite willing to print more money this autumn, if the American economy needs a pick-me-up. Rick Perry, the governor of Texas and presidential candidate, has said that Mr Bernanke will be "traitorous" if he does so, for this would help President Barack Obama´s re-election prospects. It is strange to call it treason, but if by that Governor Perry means that the American economy will be boosted by such actions, he is surely correct. This is yet another thing that could go right.


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