In Britain there is a clear distinction between what is happening in the housing market and what is happening to the real economy. News on the former is still pretty grim, whereas things such as retail sales and exports seem to be holding up reasonably well. The pound, however, continues to languish.
But what about Europe? The eurozone economy is far from a single entity and the downturn is showing up some inherent tensions within it. But the euro is soaring and the largest of the continental economies, Ger- many, is still growing reasonably strongly. The distinction in Germany is not between the housing market and the real economy but between what is happening and what industry expects to happen.
It is worth looking at Ger- many for two reasons. It is still the world's largest goods exporter, so it gives a good picture of the state of the global economy. And unlike the US, UK, France, Spain and many other nations, it never had a property boom, so the economy is not being distorted by the unwinding of overpriced housing.
So what is happening? The April Ifo business survey – the monthly health check on German industry from the Ifo Institute for Economic Research based in Munich, which came out last week, shows that the general view was that it demonstrated a cooling of the business climate, and indeed it did. The euro fell back from its peak on the news. But what seems to me more interesting is that the companies' assessment of the position now is so much stronger than their expectations for the future. The composite index declined, sure, but if you look at the absolute level of the current situation line, it is still higher than at any stage since 1996, save for a brief period in 2006-07. Looking back one year, German industry may be a bit subdued. But on a 10-year perspective, it is extremely positive.
Indeed, even on a 10-year view the outlook is pretty much middle of the range and well above the troughs reached in 2001 and 2002. You could conclude that companies that have collectively made Germany the world's largest exporter are reasonably hopeful about the future of the global economy. Note that this is nearly nine months after the banking crisis broke and comes despite a euro at $1.60 and an oil price nudging $120 a barrel. This is not economists writing their opinions; it is real business executives reporting their views about demand for the goods and services they are producing.
This is Germany and Germany is not Europe. Italian industry remains concerned, for it has lost competitiveness within the eurozone. Meanwhile, there were some muted reports from Belgium last week. And Spain, which has had proportionately the largest housing boom on the Continent, is suffering from huge indigestion in the property market and a sharp fall in construction. But those are national problems; look internationally and the perspective from Germany is still reasonably bright.
This could be wrong; German industrialists may be misjudging the future. But still it gives us some messages – weak ones but messages nonetheless – about the shape and duration of this downturn. One is that there will be clear winners and losers. We know that there are winners from the rise in the oil price: the Opec members, Russia, Canada and so on. There also seems to be a faster shift in the balance of the world economy between Asia (in particular China and India) on one hand and Europe and North America on the other. But within the developed world there will be some shifts too.
Thus Germany looks like being a clear winner. Not only is it unencumbered by a mass of housing debt, but the structure of its export industries and its close economic ties with the fast-growing Eastern Europe will see it gaining ground within the EU. It will grow faster than France and much faster than Italy this year and quite possibly next too.
Another message is that since there is still reasonably strong demand for German goods, the world economy must be growing reasonably strongly too. You could almost say that this is not a global downturn at all; it is a developed-world downturn, hitting some parts harder than others. It is certainly far from a universal phenomenon.
What about the duration of this downturn? Assuming there is no sudden drop in growth in China, always possible but not in sight at the moment, the key factor will be how long it takes for the set of complicated adjustments to happen in the hardest-hit economies.
For example, at some stage the US property market will turn round. It hasn't yet – indeed, there were some dreadful figures on housing starts last week. At some stage, also, the US banking system will be recapitalised. That has not yet happened fully and many senior money managers feel there is a lot more bad news to come out. Banking is going to be a different industry for a decade – much more cautious, you could say more sensible. Here in the UK we had quite a bit of adjusting to do too.
So the question is how well the bits of the world that aren't affected by financial problems can pull things along until the damaged bits have repaired themselves. Some parts of the world may actually benefit from the meltdown – those with cash piles that can be deployed to pick up distressed assets.
There will be three things that help tell us how well the rest of the world is coping. One will be energy and commodity prices. If these remain high, that says demand is being maintained – it says there is growth somewhere in the world. A second is world trade. This has been growing at 7 to 8 per cent a year in volume through the boom and it is going to come down to perhaps half that.
These, though, are both co-incident indicators in that they tell you what is happening rather than what is going to happen. The third indicator gives some advance warning and that is the Ifo survey. German businesses will see any change in world trade in manufactured goods months in advance, for they will see a fall-off in their order books. And so far, the news is more or less all right.
So would Turkey vote for Brussels?
Istanbul – Europe looks different from the other side. A visit to Turkey last week reminded me both of the vigour of Eastern Europe and the financial strains in the region – strains that the eurozone has left behind.
Eastern Europe? Well, yes. While only 3 per cent of Turkey's land area is in Europe and EU membership remains over the horizon, the economy is now fully integrated into the European one and the numbers are very similar to those of the EU's new member states. Thus it has been growing at between 4 per cent and a peak of 9 per cent for the past six years. Even this year it seems likely to grow at more than 4 per cent. So in terms of increased wealth and living standards, it is a huge success story.
But there are strains. The current account deficit is running at over 6 per cent of GDP; interest rates are 15.25 per cent; inflation is over 9 per cent a year; and Turkey is ranked number five on a list of the most vulnerable economies by Standard & Poor's. You can see why the IMF's European director, Michael Deppler, who was in Istanbul last week, said he was "rather pessimistic about the financial picture of Turkey".
The bigger point here concerns the financial discipline imposed by Brussels. Turkey has a customs union with the EU and as part of that deal is having to bring its duties in line with EU ones. This has unfortunate consequences. There is a row at the moment about raki, the national drink. Sales are plunging because tax has been increased and, as part of the country's heritage, Turkey is trying to get Brussels to allow it to cut the tax. But at least there is discipline on taxation. There is no such EU-imposed discipline on fiscal and monetary policy.
Does this matter? We in the UK have managed to establish a set of fiscal and monetary rules which, although bent at the edges, have allowed Britain to combine relatively rapid growth with low inflation. So it can be done. The great question for Turkey is whether it derives sufficient benefit from having a customs union with the EU or whether it could get greater advantages were it a full member.
Ultimately this is a political issue rather than an economic one, but the economic case, given Turkey's excellent growth record, would look slim were it not for one thing: the country has to find a way of establishing fiscal and monetary discipline. Having inflation at nearly 10 per cent and interest rates at 15 per cent leads to all sorts of social strains.
So does the advantage of fiscal and monetary freedom offset the disadvantage of lack of discipline? The answer to that is not at all clear.Reuse content