Sunday, November 23, 2014
Risks aplenty - but the world isn't about to go pop
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The Cassandras are out in force, from the prime minister down, predicting doom and gloom for the world economy and by extension a knock-on effect for Britain.

If China sneezes, Japan starts going backwards and Germany is forced to retire to bed with a warming glass of gluhwein, then surely the world will catch a cold. Britain’s plucky consumers, who in October bought 4.3% more than a year earlier, cannot after all keep us going on their own.

Is the world economy about to lurch downwards? Even more worrying, looking at some of the headlines generated by David Cameron’s “red warning lights … flashing on the dashboard of the global economy” are we about to have a re-run of the global financial crisis?

Nobody doubts that there are risks out there. The Russia-Ukraine crisis, unspeakable Islamic State murders in the Middle East and the Ebola epidemic in parts of Africa are all things we could do without.

Japan, the world’s third biggest economy, has gone back into recession. Germany, fourth biggest, is barely keeping its head above water. China, probably still the second biggest although the world’s largest on some measures, may never see a 10% growth rate again and has plenty of problems, including fast-falling property prices. France, fifth biggest, is stagnating.

The slowdown in China, and a disappointing performance by other emerging economies, explains the big fall in commodity prices and the fact that Brent crude oil is now less than $80 a barrel. A little bit more of a fall and oil will be half the level reached in the middle of 2008, on the eve of the worst phase of the financial crisis.

So how bad is it? Let me start with what forecasters are saying about the global economy. Consensus is always a dangerous thing but the consensus among leading forecasters is that global growth prospects for 2015 and 2016 are not looking as good as they were a few months ago but that the global economy will do better in both years than in 2013 and 2014.

So the Paris-based Organisation for Economic Co-operation and Development (OECD), in forecasts prepared for the recent G20 meeting in Australia, predicts 3.7% global growth in 2015 and 3.9% in 2016, after 3.3% this year and 3.1% last year. America will be a star performer, with growth rates of 3.1% and 3%, but even eurozone growth will pick up a little, it says, while China will grow at close to 7%, with India not far behind and Brazil picking up.

The Bank of England also sees stronger global growth, 3.75% and 4% respectively for 2015 and 2016 as, with slightly different numbers, does the National Institute of Economic and Social Research.

Forecasts are forecasts, and they could all be wrong. All the forecasters emphasise that there are risks, particularly in the eurozone. But if we look at the detail of what is happening, it suggests we should not be too pessimistic.

Japan’s surprise slip into recession was, for example, not quite what it seemed. A sharp drop in business inventories – stocks – led to the 0.4% quarterly drop in GDP and gave the prime minister Shinzo Abe an excuse for a snap election to seek a mandate to postpone next year’s planned increase in the country’s sales tax. Economists at Barclays expect growth to bounce back sharply in the current quarter, by around 1%, as the inventory drop unwinds. The outlook for Japan is more or less as it was before Abe embarked on his “three arrows” strategy, with annual growth of around 1%.

That is also the outlook for the eurozone, but it is important to distinguish between the current growth weakness, centred on France, Italy and Germany, and the earlier pronounced weakness of the so-called peripheral economies – Ireland, Portugal, Spain and Greece – which threatened to break up the system. There is much less risk of euro break-up, which would have given us a second global financial crisis, then than now.

As for China, we should get used to it being a 7% growth economy rather than it being a 10% one. That was inevitable and is largely intentional. China's central banks cut its main interest rate from 6% to 5.6% on Friday to prevent that slowdown going too far.

The bigger China got, the more it was bound to experience a moderation of growth; extrapolate 10% for too long and you get world domination. There are strains in China but there is nothing to suggest imminent collapse now, any more than at any time over the past 35 years.

The world economy is not perfect, and the eurozone is a long way from perfect. World trade, which bounced back strongly in 2010, has disappointed since, barely growing at all. The global recovery is uneven.

There is, however, nothing to suggest an imminent second financial crisis and there are positives. The fall in the oil price is the equivalent of a tax cut for most Western countries (remember all those expensive deferrals of duty increases on petrol by George Osborne). Cheaper oil will boost growth and makes it easier for central banks to maintain cheap money.

As for Britain, the recovery now looks a lot better. Chris Williamson of Markit points out that Britain’s GDP is now 3.4% above pre-crisis levels, better than Germany (3.1%), France (1.4%), Spain (-5.8%) and Italy (-9.4%). America and Canada do better, though their 2008-9 recessions were milder.

The one thing Britain’s recovery does not need is bloodcurdling warnings from the prime minister, for his own narrow political reasons, which suggest, intentionally or not, that another crash is looming.

Some damage may already have been done. A YouGov poll a couple of days ago showed that of people now expect another global financial crisis over the next 12 months. Business and consumer confidence need to be nurtured. Frighten too many people for electoral reasons and we will all suffer.