Hamish McRae: The financiers are flustered but the businessmen are upbeat, and in Scandinavia they can't stop smiling

Despite the grim warnings for 2008, the message hasn't spread to the real economy. A slowdown is coming but not yet and we won't fall off a cliff
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The Independent Online

Stockholm – the world's business and banking communities are getting ready for the annual World Economic Forum in Davos this week. I happen to be in Sweden talking to business leaders, which has given a slightly different perspective on the global economic outlook than you get from the hothouse of the City.

The big point is that the business community here is much more optimistic than the financial community in London. If you make your money in the financial sector – everything from mortgages to mergers – you will probably find it easier to do well in strong markets. You will almost certainly find things tough when credit is seriously restricted, as it has been for the past six months. But this pressure is still very much a financial market thing. It is not a general business thing.

This is true even in Britain. Sure, UK retailers have had a difficult Christmas after, it needs to be said, a very good year. But many British companies further up the supply chain are doing fine. There are exceptions, such as aircraft components and estate agents, but general demand for their products and services remains strong. They are still hiring, as the latest labour market survey shows. If things were really tough, would companies still be taking on more staff? Surely not.

In Scandinavia the picture is brighter still. Growth last year in Sweden looks like being about 3 per cent and, for now at least, the official forecast for this year is above 3 per cent. Finland is booming, in part thanks to a surge in demand from Russia; in eastern Finland, I was told, people are moaning about families from St Petersburg buying holiday homes and pricing locals out of the market. And of course Norway, thanks to the oil price, has become on some measures the richest country in the world.

More relevant to the outside world, the companies here find there is still strong global demand for their output. If you run a business in a country of eight million people, you have to think of the world as your market.

My own view, for some months, has been that the problem year for the world economy will not be 2008 but 2009. The reason for this is partly that there is such momentum in the world economy that it will take more than a year to come off, and partly that strong demand from the "Brics" (Brazil, Russia, India and China) will offset much of the decline in the large economies.

However, I had thought I was pretty much in a minority of one here. All the economic forecasts I have seen show slower growth this year and a recovery in 2009. There is a debate about the scale this year –whether there will be a recession in the US and so on – but there is no debate that 2009 will be a better year than 2008.

Well, it seems I am not alone after all. Many of the people I have talked to in Sweden agree, with one pointing to full order books and concluding that 2009 might not be the problem either; he was more worried about 2010.

It is good to talk to real business people rather than the analysts in the financial markets. I suspect that this divergence of opinion will be evident in Davos and I shall try and catch a feeling for it in next week's column. I was not at Davos last year but I understand the mood there was unfailingly upbeat, with the main concern being the environment rather than the business outlook. I was at the mini-Davos in China in September and things were still upbeat. But you have to keep recalibrating your view and one small piece of new information came in last week that signalled some caution. It was a sharp fall in international shipping costs.

The chart shows the sudden fall in the Baltic Dry index (BDI) of shipping rates, down 25 per cent in a week, and compares that with the still-high oil price. The point is that any shading down of world trade is likely to be swiftly signalled in a downturn in the cost of shipping stuff around. Shipping rates have shot up, as has the price of oil, as has the price of raw materials in general, as has the price of food.

The question is whether the first signs of the downturn are becoming evident, or whether this is just a blip. Given the surge in transport costs, some reaction would be understandable, just as some shading back in the oil price is understandable. Absolute shipping costs remain very high. Indeed, even if the rate of growth of world trade is slackening a little, it is still growing strongly. But the fall in the BDI does suggest we may be at some sort of cyclical turning point.

So how should one square this with the mood of the Nordic business community, or indeed the mood of business people in China and India? I think the best answer is that there is a time lag between what the markets are, in their incoherent way, trying to signal and what is happening to real economic demand. For several years, the US consumer has acted as "consumer of last resort" to the world economy. We now have the sovereign wealth funds of the Middle East and Asia acting as "investor of last resort" to US financial institutions, replenishing the capital they have so foolishly squandered. But it is not clear that consumers in the Brics can really replace their US counterparts. Sure they will keep spending, but the scale of their purchasing power is considerably smaller than that of America. So global growth will indeed slacken. But it won't disappear and in any case it will take a long time to feed through, notwithstanding that dip in freight rates. Indeed, if the US does manage to introduce some sort of reflation package, the downturn might be pushed further back.

Put this all together and what do you get? The prospect is for a slowdown, yes, but one that will start later and be less deep yet maybe more protracted than the official forecasters are now saying. From the point of view of the world economic community, this would be much more favourable than the "off a cliff" stories you read. Gradual change is much easier to plan for and accommodate than a sudden lurch. So less of a disaster, more of a slog. Let's see what the world's economic leaders make of all this in Davos.

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