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|Be Bold and Resolute - and Start Taking Risks|
The Times - July 23, 2012
The sun has got its hat on, at last, and many are about to luxuriate in all that lycra at the Games. It will be a distraction, of sorts, from the economic gloom that surrounds us, what with the euro-zone recession, figures for British growth on Wednesday which may well look bleak, slowing economies in China, India and Brazil, and slow, Obama-threatening job-creation in America. Yet gloom is anyway not the right thing to focus on. The right thing is risk.
On the face of it, this is obvious. People, especially corporate bosses, often spout empty phrases about how there’s lots of uncertainty about, as if there had ever been a time when we could be certain about the future. Yet there is a bit more to this right now. Perceptions of risk affect the way in which companies and investors behave. And currently this is making both managements and financiers ultra-cautious, which is itself weakening economic activity.
A small historical comparison might help. The new, gloomier forecasts put out a few days ago by the International Monetary Fund were rather reminiscent at least to this data nerd of ones it put out a decade ago. Then, as now, the IMF said global growth promised to be slow-ish, at around 3.6% in the year ahead. The prospects were gloomy.
Reporting this, as in those days editor of The Economist, I put on our cover a becalmed sailing ship representing the world economy, with a title of “In the doldrums”. Sure enough, during the next five years global growth was actually the fastest it had been in more than 40 years.
It would be nice to think that could happen again, and that forecasters would all turn out to have been much too pessimistic. It isn’t impossible: the emerging economies are probably only in a temporary slowdown, caused by their efforts to reduce price inflation, and the United States has a remarkable ability to reinvent itself, as it is now doing with its oil and gas boom.
Yet let’s be realistic: it isn’t likely. And the big reason doesn’t lie in China or in the United States. It lies in risk, or rather in the feelings that companies and investors now have about risk. Even though a war had started in Afghanistan in 2001 and was going to start in Iraq in 2003, companies in those days did not feel that in their businesses, in their markets, in their investments, the risks were large. But they do now.
Thanks to Donald Rumsfeld’s talent at producing nice soundbites even while he was grossly mismanaging the wars, such risks are now often described as “known unknowns” or even “unknown unknowns”. The problem is that the risks that worry managers and investors are really “known knowns”. It is just that it feels impossible to work out how to adjust the business, or the investment, to deal with them. Except by just sitting on cash.
The Arab Uprising, with civil war now under way in Syria, is one example, especially when combined with the tension over Iran’s nuclear programme: this makes the price of energy even more unpredictable than usual. The welcome and helpful fall in oil prices that occurred in recent months has been partially reversed, as a result.
Concerns about China’s economy, and about its political stability following the scandal and murder accusations surrounding Bo Xilai, former mayor of the Chicago of China, Chongqing, fall into a similar category. The worry about China is probably exaggerated: the government’s capacity to support growth through monetary and fiscal policy remains strong. But at a time of general nervousness about risk, some companies do seem to be holding back their investments out of worry about China’s future.
Even so, we all know that the biggest source of worry is much closer to home. It is Europe. The problem is not simply the fact that government debts are huge, that growth is non-existent and that there is a basic disagreement between the debtor and creditor countries about how the euro should be run. Those things are important. But the real problem is that the range of possible outcomes looks so wide.
How can a company take into account the possibility of Greek withdrawal from the euro? What percentage probability should it give to the chance that the currency might collapse altogether? What should companies think about the next Italian elections, for example, with Silvio Berlusconi scheming a comeback and thinking aloud about whether Italy should leave the euro?
The intellectual answer may be that the chances of Greek exit are high, but that the chance of a complete collapse are low. The chance of Italy leaving the euro and defaulting on its debts is virtually non-existent: every Italian bank would immediately collapse, for they are stuffed to the gunwales with government bonds.
However intellectual answers are not enough. Corporate boards and financial institutions have to make decisions. So what they are doing, increasingly, is not to invest at all. They are cutting debts and accumulating cash, or putting it in low-yielding, seemingly safe places such as German Bunds.
Much of this sentiment is outside the scope of governments to deal with. They are not psycho-therapists, and cannot conjure certainty out of nowhere. But what governments should do, especially in the euro-zone and in Britain, is to reflect hard during their holidays about whether there are ways in which their own policies are feeding this nervousness.
An obvious case is America, where failure to deal with the “fiscal cliff” of mandated tax rises and spending cuts currently due after the November elections is causing jitters. And naturally the euro-zone needs finally to decide how to get Greece out, keep Italy and Spain in, and to manage collective liability for debts in a way acceptable to German voters.
It is also true in Britain, however. What can businesses make of an energy policy that keeps changing every five minutes? Or of a transport policy that is unsure whether Heathrow is to be abandoned or expanded? Or of financial regulation that one minute wants to “protect” financial institutions in the City from those beastly European regulations, the next minute is shown to have overlooked scandals and the minute after that wants to put bankers on a shorter leash? Or, sorry George Osborne, of a budget “for business” that created more uncertainty than ever?
There is plenty of cash around. It is just that it is not being spent. And no wonder.
Bill Emmott’s latest book, “Good Italy, Bad Italy” has just been published by Yale University Press