Will 2012 really be so bad?
The festive season has proved profoundly unfestive to judge by the relentless deluge of gloom from the world of officialdom.
Christine Lagarde, the French managing director of the International Monetary Fund, turned up the volume last week with the comment that the eurozone crisis was so serious that it could not be solved by the eurozone countries alone. The rest of the world have to help too.
Let's leave aside the plight of the eurozone, and not only because there has been so much of it in the papers that some of us are beginning to reach for a euro-overload trip-switch. No, the reason for setting the eurozone aside is that while it is some 15 per cent of world GDP, the other 85 per cent matters too. What we are seeing is a continuation of the familiar situation of a two-speed recovery. It is just that the slow group, the developed world, has slowed a little more relative to the fast group, the emerging economies.
But the developed world still looks as though it will grow next year, while any slowing in the emerging countries would be rather welcome, to take pressure off their economies. Some numbers make this clearer. I have been looking at the latest Goldman Sachs forecasts for growth next year and the main chart shows these for the G7 and the Bric countries.
The prospect for the G7 is lacklustre. US growth at only 1.4 per cent would be the slowest since the recession, while that for Japan is temporarily boosted by post-earthquake reconstruction. None of the big European countries, including the UK, have the prospect of more than 1 per cent, and the eurozone as a whole is barely expected to grow at all. But the other side of the equation is China still growing at 8.6 per cent, India at 7.4 per cent and Brazil and Russia at more than 3 per cent. The world as a whole is projected to grow at 3.5 per cent, a little below its average over the past decade.
You can have several different reactions to this. One is to say that this is pretty much a "business as usual" outlook and does not take into account extreme events such as the break-up of the eurozone. Goldman would acknowledge that the risks are on the downside and these forecasts are materially less optimistic than those of a few months ago. The financial stress indicator that the bank calculates does show banks are under considerable pressure, but no more than at previous periods during the 1990s and the first part of the 2000s.
Another would be to say that for large parts of the eurozone to go back into recession (or for some members to remain in recession) will create social and financial strains that will have unpredictable consequences. Still another would be to say that a two-speed world may be inevitable but that it will be unpleasant for all developed countries, including our own, to adjust to our relatively smaller role in the world economy.
My own feeling is that the pause in the recovery will speed up the shift of power that is already happening. As a result, the quicker we in the western world adapt to that, the more likely we are to benefit. That, surely, will be the thing to look for next year.
Countries adapt in different ways. The US has been supremely successful in attracting the best brains of the emerging world to its great universities and then keeping them within the US workforce. Germany has been successful in exporting to the emerging world. Here in the UK we have been successful in attracting investment from the emerging world, with the outstanding example being the way in which Tata of India has turned round Jaguar Land Rover. We are getting skills and access to markets as well as investment cash.
The problem is that the macro-economic story is so noisy that it drowns out these micro-economic tales. When some figures on retail sales are published showing a fall, these hit the headlines – notwithstanding the upward revision of previous months' data. When Jaguar Land Rover opens a new production line, it barely gets a mention. The macro-story matters but it is the structural changes that ultimately get remembered. We recall now how the internet boom grew and then collapsed, and at the time there was great focus on whether the pricking of the bubble would lead to another recession. But now we can see that period in context, the macro-economic story seems much less important than the social and commercial consequences of the development of the internet. Look at the explosion of online shopping and the pressure on the high street.
When, in another 10 years, we can get some perspective on this period, I suspect the outcome of the experiment of the euro will come to be seen in a similar light to the end of the gold standard, the break-up of the Bretton Woods fixed exchange rate system and the sterling area, and the demise of the convertible rouble. It will go into the economic textbooks and be studied alongside the fate of other currency unions. But the real issue for the world economy in 2012 will not be the euro, but the shift of economic power. What can European nations, indeed all developed nations, do that other countries on the other side of the world cannot do equally well?
Actually, I think there are lots of things we can do. Indeed, if you look across Europe, the best remains quite wonderful. With a few exceptions where the US dominates, such as medical research and software development, Europe does top end terrifically well. Even laggards such as Italy and Spain have huge competences, things they can do better than anyone else. Italy in particular is fascinating as, quite aside from the excellence of many of its companies, it also manages to deliver the most envied lifestyle in the world. If it could bottle that and sell it, all its problems would be over.
The big point here is this: if the world economy does indeed grow by 3.5 per cent next year, surely it is reasonable to hope that we in the so-called advanced countries can use that growth to lift our own game?
French pique over credit downgrade is a symptom of the nation's loss of strength
The outburst by the Banque de France's governor, Christian Noyer, right, about how it is the UK, not France, that should be downgraded by the rating agencies was interesting, and not just because it showed how the French elite views the world.
The striking thing was not just his frustration with the rating agencies, but rather his lack of understanding of how financial markets behave. Politicians always find this difficult but you would expect a central banker to have a better ear.
He is, as head of the French central bank, also on the board of the European Central Bank. While the ECB has steered a reasonably deft path between its constitutional duty to contain inflation and the need to maintain orderly markets, there are huge pressures on it to do more.
The focus is on the pressure on European bond markets: should the ECB do more to hold down yields for Italy and Spain, even if it means piling up bonds that carry a clear risk of default? But there is a back-door way in which the ECB is financing weak countries, which is arguably more significant. Germany's Bundesbank has quietly lent €495bn to the ECB, lending that has balanced huge borrowings by the central banks of weaker nations including, most recently, France.
These loans are leading to tensions within the ECB. I suspect that the French board member's harsh words reflect an awareness that France has moved from being a strong country, able to help rescue others, to one that is starting to need help itself.