Your survival kit for a year of promise
Sunday 05 January 1997
You have to start somewhere - there has to be a base - and the mainstream forecasts for economic growth this year do provide that. The consensus forecasts for such growth in the main developed countries are set out in the table, together with some City estimates from Kleinwort Benson (which I actually think are rather more realistic) for these countries and for other economic regions. As you can see, the mainline prospect is one of slowish growth in the developed world (aside from the UK which will grow rapidly) and rather faster growth in Eastern Europe, Latin America and East Asia.
Couple this with subdued inflation and manageable trade imbalances, and the prospect is for a decent year - although there may not be enough growth in Germany or France to stop unemployment rising still further, particularly given the rapid tightening of fiscal policy that both countries are undertaking to try to meet the Maastricht criteria. But at least they face slightly better growth than this year. North America engineers a soft landing from its long boom and, importantly, Russia experiences real growth at last.
This reasonably benign forecast would be broadly endorsed by the main official forecasters - organisations like the OECD and the IMF. Some private sector forecasters are even more optimistic, arguing that the world could experience a synchronised expansion without inflationary consequences. But while it is certainly worth being aware that surprises can be pleasant as well as unpleasant, this year there is little real danger that things will turn out better than forecast. Instead, there seem to be three main threats that they might be worse.
The first is that the continental European economies will have another year of very slow growth similar to 1996. For some months now Nikko Europe, the London end of the Japanese securities house, has been monitoring economic news from France and Germany to see if the current news supports the idea that these two economies are recovering.
The result is glum. The negative score is steadily increasing, with hardly any positive signs in December. Typical examples in France were the survey on 31 December by the employers' organisation which found that two-thirds of its members did not expect any recovery until the summer, and a 19 December survey suggesting that car sales would fall 10 per cent this year.
In Germany a similar exercise produced much the same result. A survey on 29 December of the five main industry associations showed that four of them expected their members to shed more jobs this year, which chimed in with a forecast last week that unemployment in Germany would rise from its present 4 million to 4.5 million this year. True, German exports are doing well and that is pulling the rest of the economy along. And the German government plans to cut the top rate of income tax to 35 per cent (which would be the lowest among the developed countries) to try to stimulate demand. But that will not be for a couple of years; meanwhile Germany, like France, faces a depressed home market and rising unemployment.
The result? If these negative signals persist, the stagnation in both France and Germany in the second half of this year could easily run on through most of next. Nikko suggests that both countries would struggle to reach 1.5 per cent growth next year. This is much lower than the consensus, maybe low enough to cause a revival of the social unrest evident in France 15 months ago, and certainly bad news for all of Europe, not just Germany and France.
Risk number two is, I think, in East Asia. The general assumption is that all will be fine; rapid growth will continue. That is probably right but there must be an outside chance that the underlying fragility in East Asia will manifest itself this year. It is possible that the Hong Kong economy will be destabilised by the takeover by China, though I suspect that problems there will take a couple of years to emerge. South Korea is facing serious labour disruption at the moment. The Malaysian economy is overheated. In fact there are very large current account imbalances within East Asia which have gone largely unrecognised in the West. On a 10-year view the East Asian time zone will continue to be the most vibrant part of the global economy; but there will be hiccups on the way and one of those hiccups could come this year.
If the East Asian economy falters, that would have a knock-on impact on the west coast of America and, to a lesser extent, Europe. To say that is not to herald disaster; merely to remind people that the world economy has become increasingly interlinked and we have no experience of a downturn in East Asia.
Risk number three comes from the United States. Somehow the US must emerge intact from what will have been one of its longest periods of uninterrupted growth since the Second World War. Everything ought to be fine. As Kleinworts points out, it is hard to see growth below 1 per cent or above 3 per cent. But at some stage the US share market will have to adjust and the country now has little collective memory of a bear market. More than this, we know very little about the links between the stock market and the real economy except that the surge in people using mutual fund accounts almost as bank accounts will mean that the links will be different from those of a decade ago.
There is a further concern in the US: the current account deficit in the third quarter of 1996 was its largest ever. The accumulation means the US has a deficit on investment income as well as merchandise trade, and there is always a danACOaaaaaceeeeiiinoouuupounds Oo...--""`'ger that the funds that have been financing these deficits will dry up. This could have a number of effects. One might be a sharp fall in the dollar which would unsettle the European economy. An alternative outcome might be a rise in US long-term interest rates, for higher rates would be needed to attract funds from abroad. In truth we don't know what might happen were the rest of the world to resist financing the US deficit, but we should certainly list this as a concern.
These three concerns might appear unnecessarily gloomy - and in a way they are. Remember their function, though. These are not things which will probably happen. They are things which people interested in the world economy should tuck away, so that if there is a sudden change in the outlook they are prepared for it.
To most people in Britain it might seem surprising that this country hardly appears in these concerns. That is right. There really is very little that can happen here which will have damaging knock-on effects on the rest of the world. That is partly because this economy is too small - perhaps 5 per cent of world output - but also because the one thing that all forecasters are confident about is that the UK economy will see a year of solid growth. That growth will, inevitably, require rising interest rates to control it. From a parochial point of view, be prepared for that. It would be interesting if risk number one proved correct and we found ourselves looking across the Channel, fretting about the high interest rates we needed to control our boom, while the rest of Europe languished in near recession.
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