Friday 17 November 2017

Emerging economies hold world's purse strings

Stphane Garelli

Raymond Barre, a former French Prime Minister and author of numerous economics textbooks, told me one day: "One of the few things we know about economics is that it has cycles -- the problem is that we do not know when they start, how long they last and why they end."

The stigma of modern economics is that we still do not know how to avoid recessions and unemployment. This is my fifth recession -- some of the repercussions I have seen take place are expected, while others have proven to be totally new.

Recessions occur at regular intervals. In the US, there have been 32 recessions since 1854. Globally, the four most recent recessions took place in July 1981, July 1990, March 2001 and December 2007. If the same pattern repeats itself, the next recession will probably take place nine to 10 years from now.

It is doubtful that many governments will have had time to restore public finance to confront the next "big one". In addition, the "real" debt of nations is deeper than reported. The US national public debt exceeds $12 trillion. However, if we include local debt plus Medicare and social security, it runs at over $105 trillion. For most advanced economies, the real level of debt is three to five times their GDP.

Recessions

United we enter -- disunited we emerge. Growth produces a greater synchronisation of economies: nations went into recession at more or less the same time. In contrast, recessions generate de-synchronisation: everybody escapes from the big black hole at different speeds.

The recovery of Europe is relatively flat, with growth of around 0.5pc; the US is recovering faster, at above 2pc; Brazil and Russia can expect to reach 6pc, and a significant part of Asia will grow at rates of above 8pc.

Even within regions, the differences can be significant: in Europe, Germany could very well grow by 3pc, outpacing the other large European economies.

Finally, every recession is followed by a jobless recovery. Unemployment remains high in the US at 9.5pc and in Europe it is close to 9pc.

Youth unemployment is particularly worrying: 18pc in the US, 20pc in Europe and an alarming 42pc in Spain. A jobless recovery for about one year is the norm.

Companies start hiring again only when they are convinced that the recovery is for real.

Experience has also shown that even companies that fare relatively well during a recession also tend to cut jobs or use part-time employment to increase their productivity.

There have been the unexpected repercussions. First, the "boomerang" effect is broken. For years, US and European governments have lived at the expense of others: both regions ran current account and budget deficits without really suffering the consequences.

The money accumulated by emerging economies would always come back "home" -- re-invested in government bonds or real estate.

Lack of stability

This was because of a lack of both political stability and stable investment opportunities in emerging economies. Without noticing it, industrial nations have expanded their public debt to dangerous levels. Today, a significant part of this debt is owned by emerging economies. China holds $877 billion and €520 billion in US and European government bonds respectively.

But now the money is invested "elsewhere." For a while, emerging economies showed some interest in investing in industrial nations or in buying western companies. Now, however, new alternatives are available.

Finally, we have also seen the emergence of a "South-South block". For the first time, an increasingly self sufficient "South block" -- lying south of a diagonal between Mexico to Moscow -- is creating its own momentum. Despite disparities, these economies can rely on an emerging middle class, huge raw material resources, home grown technologies and money.

They breed an impressive number of global brands in banking and industry. Haier from China -- practically unknown a decade ago -- has recently become the largest household appliance company in the world.

Many companies also enjoy the active support of their government: 21 of the 22 largest Chinese companies are state financed.

These economies also develop a new business model for the "emerging poor", a population escaping from absolute poverty but that has not yet reached middle class status: microfinance, mobile phone transactions, cheap cars or computers are just a few examples.

In the end, the next recession will be the real moment of truth for advanced economies and businesses and governments had better be ready for it.

An ageing population used to a standard of living increasingly subsidised by state aid and public borrowing abroad may be in for a harsh reality check with a reduced standard of living.

What would happen, economically, politically and socially if emerging economies decide to close the money tap? Advanced economies have never been so vulnerable.

They are now in dire need of a new solid economic model and they may have to rediscover frugality.

Prof Garelli is the Director of the IWorld Competitiveness Centre at the IMD business school in Lausanne which publishes the annual World Competitiveness Yearbook.

Irish Independent

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