Things are bad, but not that bad – at least, that's the view from three of the world's top economists, who also predict that emerging economies such as those of India and China are set to benefit from any economic downturn in the US.
“We are having an economic crisis, but it is very focused on the US,” suggested Gerard Lyons, chief economist and group head of global research at Standard Chartered. “The US is the biggest economy and because of that what happens there has an impact. If there is a deep, long US recession, then that slows global growth. The last time the US had a downturn was 2002 and it was a v-shaped, low downturn. The crisis there this time is not just on the financial sector, but among consumers.”
Lyons, speaking at the Premier Business Leadership summit organised by software firm SAS in London this week, argues that what will happen next is a significant scaling up in markets such as China. "It's very easy to get wrapped up in what's happening in the west, but there is s fundamental transition in the world that will have a profound effect on the balance of economic power from west to east,” he argued. “Asian economies have a current account positions that are good and are well-insulated. I spoke to someone in Brazil a couple of months ago who said that it didn't matter if the US had a recession, but it would if China did.”
China is a force to be reckoned with, he argued. “I went to a medium-sized town recently and visited town planning,” he said. “I pressed a button on a display and saw what had currently been constructed. Then I pressed a button and saw what's planned for the next ten years and it was a metropolis. They have built a dam and it will reach a water level next year where they will be be able to export in mid-sized tankers. They have built two ports. They have a locked-in labour force of 100 million people in the region and the current wages are less than on the coast of China.
“India is very interesting also, its catch-up potential is enormous. India is a democracy, but its biggest problem is lack of infrastructure. When the Brits left India, they left behind a very efficient civil service, but that has led to lots of bureaucracy. But it is a young country.
"In China, a lot of people are worried that they will be old before they are rich; in India, 45 percent of the population is under the age of 19. India needs to easy up on the regulation side and work on the infrastructure, but the opportunity is there. I talk to a lot of companies who feel that they missed out on China and don't want to miss out out on India.”
But things aren't as bad as they might seem in the US, according to Joseph Quinlan, managing director and chief market strategist with Bank of America Global Wealth and Investment Management. “We're not eating as much steak and it's Hamburger Helper time, but the US consumer will hang on in there,” he predicted. “The US economy has a simple equation: jobs = income = spending. Now, I think we are at stall speed economically. It could go flat and then the question becomes what is the recovery rate. The silver lining is that we are still exporting. We have a huge trade deficit, but the exports are holding in there and that will carry us through.
“If you take away the financial angst and stress, the economy is still in a decent shape. There might well still be one or two nasty things around the corner. There could be another banking institution that has a run on it, but we're closer to the end than the beginning [of any crisis]. There will be slower growth over the next few quarters, but this is about rebalancing.”
Rebalancing is also something that will be reflected in the UK economy, reckoned Dennis Turner, chief economist at HSBC Bank. “We are likely to hit a sticky patch,” he said. “Growth will half and it will be slowest rate of growth since the last recession, but it will still be growth. The economy at the end of this year will be bigger than it was last year. There won't be a recession. What we might see is SARS – severe acute recession syndrome, which is a mental condition whereby if people believe there will be a recession and act as though there will be a recession then there will be a recession."
This mirrors what I said in the Editor's Blog a few weeks ago: fear of recession becomes a self-fulfilling prophesy; especially in the blog-fuelled Internet world where information is valued by the speed at which it moves. Fear becomes fact at Internet speed.
"It's easier to talk an economy down than up," he continued. "Ours is not an economy about to go off a cliff. We've had 63 quarters of positive economic growth. we have more people in employment than ever before. This is about an economy that is resetting. We are going to see two to three years of sub-trend growth. Now that unfortunately is a politically inconvenient length of time.”
But there are clouds ahead, particularly in relation to the public sector. “We have an enormously large and inefficient public sector,” argued Turner. “One fifth of the total labourforce works in the public sector. Median salaries are higher than in the private sector – and we have unfunded liability for public sector pensions of one trillion pounds. And it's inefficient because productivity is lower than in the private sector. The government has been muddled. It has assumed that if you pay the same people more money to do the same jobs, then somehow that's an improvement. But we haven't seen the reform to go with it. You can have better public service without it being owned by the public sector.”
However, Turner argued that the UK has been better placed than other countries in Europe. “In the UK, we have very different perceptions of Europe. We go for breadth, some of the founding father countries go for depth,” he noted. “They would rather have more common policies and structures and greater integration. "We welcomed the east Europeans, we'd probably be more welcoming of Turkey than some of the founding countries. In some ways Europe is still looking inwards and being myopic. There are structural deficiencies and tendency towards protectionism.
“We are actually better Europeans than many other countries in Europe,” he added. “We have free movement of goods and people. When the 8 countries of Eastern Europe joined the EU, only3 countries accepted the free movement of labour clauses – us, Sweden and Ireland. We have free movement of capital in the City of London. Have you tried buying a French company recently?
"He concluded: “It's a different world and a different economy. You don't manage the economy the way Dennis Healy did. When I was a boy, the Chancellor of the Exchequer was a big man, the financial director of UK Plc; now he's the CFO of a subsidiary company called UK Ltd, an arm of Global Plc.”
