One of the troubles with having international monetary meetings is that people assume finance ministers and central bankers are somehow in control of the world economy. Of course they are not. If they were, we would not be where we are now.
They do, however, have influence, for good or evil. And in recent years the balance has been rather negative. They allowed the global financial bubble to grow. Central banks in the developed world held interest rates too low. And the financial authorities in much of the developing world artificially depressed their exchange rates, building up foreign, exchange reserves. In addition many developed countries, including our own, ran over-loose fiscal policies. The result was a world awash with liquidity – money or access to money. Those funds had to go somewhere. Much ended up in property, huh.
So now this weekend, finance ministers and central bankers are in Washington for the spring meetings of the International Monetary Fund and the World Bank. Because this coincides with a particularly rough time in the financial markets, they have to say something, and we have had various speeches plus a communiqué. But the first rule when trying to calibrate the significance of any such meeting is to look not at what people say but at what they do. So you look at whether central banks are cutting interest rates and, more important, the response on the money markets to their actions. You look at budgetary policy. And you look at actual regulatory changes rather than statements about such change.
As far as interest rates are concerned, the most interesting thing is not the cuts by the US Federal Reserve and the Bank England, or the fact that the European Central Bank has refused to join in. It is that money market rates have failed to fall in line. The most important rate is the interbank one, at which banks can borrow or lend to each other. The usual acronym is Libor, pronounced lie-bore. This stands for the London inter-bank offered rate, and is calculated for various maturities from over-night to one year and in various currencies. The London rate is the most important because, as the British Bankers' Association points out, 20 per cent of world bank lending and 30 per of foreign exchange trading takes place there.
So what has been happening? Well, last week the Bank of England duly cut the base rate by a quarter point to 5 per cent, but Libor hardly moved at all, remaining close to 6 per cent. You would expect it to be a little above the Bank rate but not three-quarters of a per cent. It is almost as though the Bank is pulling a lever but there is nothing attached at the other end. This is not just an issue for sterling, for much the same is happening to dollar and euro rates. If the central banks cut their rates by enough and pump money into the system, eventually money market rates will come down but it will take a while.
So while the central banks do still have some authority, they are weak – weaker than I ever recall. Finance ministries are weak, too, or at least most of them are. The US Treasury is weak because of the weak dollar, which may yet need to be rescued. Our own Treasury is weak because of the huge and growing budget deficit. The Chancellor could not do anything in the Budget, as you may recall, except introduce some ill-considered tax changes. The French and Italians are in much the same bind.
But there are some countries in a stronger position. The most interesting thing I have noted in recent weeks has been the steady appreciation of the Chinese yuan. The Chinese authorities have been under huge pressure from the US Congress to allow their currency to rise for some three of four years. But they permitted only a small rise in response to that; they don't like being told what to do by foreigners. What has changed is that they now grasp that it is in their self-interest to allow a stronger yuan. The reason is domestic inflation, which is starting to cause social unrest. A strong currency cuts the cost of imports, particularly imported fuel and raw material.
The big point is that imbalances between the US and China are now being tackled. Since these have been one of the most destabilising features of the world economy for five or more years, that is really encouraging.
What is happening is a shift in power. This was starkly illustrated by the IMF's World Economic Outlook, its twice-yearly economic report, published last week. It attracted a lot of headlines here because the forecast for UK growth this year was cut to 1.6 per cent, which is below the bottom of the Chancellor's range of 1.75-2.25 per cent. That seemed to me to be less important than the big story, which is that this will be the first global downturn that sees the developed world slowing dramatically while the so-called "emerging" economies canter along pretty much unaffected. The graph on the left shows the IMF's numbers for 2007/08/09 for the Group of Seven and for the Brics, the acronym coined by Goldman Sachs to describe the largest of the emerging economies – Brazil, Russia, India and China. As you can see, it looks a pretty pitiful performance from the seven of us and a stunning one from the four of them. China will overtake Germany this year to become the world's third-largest economy after the US and Japan. India will probably overtake the UK within 10 years.
Set in the context of this huge shift in economic power, discussions about the fragility of the West's banking system seem almost a sideshow. The US is now probably in recession due to its financial fragility and that will have a dampening effect on the rest of the world. The UK will experience two or three years of slow growth as a result of the debt burden carried by many homebuyers. But looking at the world as a whole, growth prospects are none too bad.
A lot of lessons are being learnt by the bankers and their regulators. There will be a spate of re-regulation and changes in the way banks manage their business. I hope also that central banks acknowledge their complicity in the current troubles – in particular their error in focusing too narrowly on controlling inflation, while neglecting their wider duty to maintain general financial stability. As for the world economy, well, remember it is self-repairing. Even with pretty sub-optimal government policies, it will reorganise itself – though if the IMF is right, that recovery, for the G7 at least, is some way off.
At $112 a barrel, we must save every drop we can
It is just possible that the sharp pain we feel when we fill up the car might ease a little through the summer. The reason is that there are some signs, small ones, that the present level of oil prices is pegging back demand.
Tax apart, there are two elements determining petrol costs. One is the crude oil price; the other exchange rates. There is a further tweak with diesel prices because of the lack of refinery capacity and the boom in diesel cars, but that is a separate issue.
The price of crude hit an all-time high on Wednesday, reaching $112 a barrel in New York, so might it not go higher still? Of course – but at this sort of level people are starting to figure out how to use less of the stuff. The Bank Credit Analyst team points out that US motorists have cut the number of miles they are driving this year, something that has not happened since 1980, though the decline is not as sharp as then. They are also switching to smaller cars, although this takes a while to feed through into lower total consumption.
Something else seems to be happening in the rest of the developed world, for overall oil consumption has fallen this year, though again not yet nearly as much as it did in the early 1980s. Consumption has not gone down in the developing world, though, and given growth prospects there, it seems unlikely to do so. But at this price there is a huge scramble to switch to cheaper fuels for heating and power generation, as well as pressure to figure out ways not to use the car.
Exchange rates? Well, the pound has stuck close to $2 and that is relatively strong by historic standards. Unfortunately, since the dollar is so weak, that does not help us as much as it should. One of the reasons why the dollar price of oil is so high is that this reflects the weakness of the currency. So we need both the dollar and sterling to pull up a bit. The chances of that? There is the possibility of a true collapse of the dollar, which would be serious for the whole world economy, not just the oil price, but at some stage currency markets do turn. In any case, sterling has fallen quite a lot in recent weeks, particularly against the euro, and it is possible that trend has more or less run its course.
Eventually an oil price above $100 will boost supply, but that is a long, slow business and meanwhile the demand from the developing world will continue to climb. So do not expect any plunge in prices. But at some stage every market turns, and even a plateau at the present level would be very welcome.Reuse content