THERE WERE WIDESPREAD
but foolish claims over 2007/2008 that the global economy had significantly “decoupled” from the United States. Even the traditionally cautious International Monetary Fund and the World Bank got into that act. That meant, this view urged, that economic slowdown in the US – including technical recession, if it happened – would have only modest adverse effects on the rest of the world.
In other words, the traditional adage that “when America sneezes, the world catches cold” supposedly no longer applied. Global growth was now primarily driven, it was urged, by China, India, Russia and other emerging market nations in tandem with the European Union. Japan was largely and absurdly left out of the whole debate.
In this column I repeatedly warned that version of “new economics” had major weaknesses. Events are now bearing out that reservation almost daily. Reality is that the global economy generally – no matter that some countries are still growing strongly – remains appreciably dependent on developments in the US. That clearly has vital implications for the outlook for SA.
A report in The Times of London on 12 August noted: “Metals prices tumbled yesterday, leading a broad-based sell-off across commodity markets as fears of a global economic slowdown and the resurgence of the US dollar vexed investors.” It added: “Having risen relentlessly for months, prices of key metals went into an abrupt retreat, fuelling speculation they could succumb to a sustained decline.”
A core paragraph in the report noted: “ The broad slide in prices across metals markets came as anxieties of badly faltering activity in the Eurozone and nervousness that buoyant emerging market economies could also now suffer a slowdown, fuelled worries that weaker global growth would undercut previously booming demand for commodities.”
The newspaper’s economics columnist, Rosemary Righter, picked up further on that theme. She observed: “European analysts have been so fixated by America’s travails that they’ve barely noticed how rapidly business activity and economic sentiment were collapsing across the Atlantic.” Righter continued: “The signs were there for all to read. Europe is heading into a recession from which it will struggle to recover, while America may have got away with a relatively minor contraction from which it may rebound sooner than expected.”
But what about the rest of the world, other than the US?
Malcolm Moore commented in the London Daily Telegraph on 13 August: “Japan’s economy is flirting with its first recession in six years. A strong fall in consumer spending and a cutback in public works projects resulted in a 0,6% contraction in the world’s second-largest economy from April to June. The news could indicate that Japan’s six-year growth spurt has come to an end because of the surge in food and energy prices.” Fortunately, however, Moore continued: “Economists say any Japanese recession is likely to be short-lived.”
Julian Jessop, chief international economist at British-based Capital Economics, advises: “The Japanese economy should be among the first to recover as the international inflation shock recedes later this year.”
However, Bank of England Governor Mervyn King says 2009 will be “painful” for Britain as major setbacks are still being seen in the housing market and the increase in the cost of living heads to 5%.
Roger Bootle, MD of Capital Economics, offers his view on that. “If you hear someone saying that what’s gone wrong in Britain is merely excess lending in the US subprime market, buy them a cool, refreshing drink – and pour it over them. The current British ills are primarily the natural and inevitable result of the mammoth bubble in the housing market in this country, as well as internationally.”
China is still holding up well, as we might expect. But there’s no way its economy has the muscle to act as lead locomotive for the world generally. Indeed, as economics consultant Kevin O’Brien suggests: “The significance of the negative short- and medium-term US economic outlook is especially troubling to China’s export sector, which is the main hard currency earner for the Chinese government. As US consumer spending continues to retreat, the economic effect is anticipated to produce severe structural pressures on China’s export-driven domestic economy.”
London’s Financial Times reports: “India’s economy is expected to grow 7,7% in the year to March 2009 – cooling from the year before and less than a recent forecast from the nation’s central bank. That’s now the forecast of the Indian government.” All that means: The world is still greatly reliant on the US economy. The US economy has been hit more by oil and food price shocks than the subprime credit affair. SA can grow only modestly – assuming ongoing domestic socioeconomic policies and political uncertainties – until there’s a big change for the better internationally.
HOWARD PREECE email@example.com