Unless private spending picks up, economies will be weak. The trouble is, with demand sluggish, many firms are thinking twice about increasing their spending. The result is a continuation of the difficulties that have engulfed the euro area in recent years. This means further problems for Greece, and future worries for Spain, Portugal and Italy, as they will be in recession, probably this year and next. Another challenge is the US. I am positive about America’s long-term prospects. If there were to be a pleasant surprise this year, with US growth being much higher, it would be because big companies whose balance sheets are in good shape decided to go out and invest. Instead, they seem reluctant, either because they fear demand will be weak, or because they are worried about the regulatory outlook following this year’s presidential election in November. Confidence, of course, is an impossible thing to predict. It would be pleasing if a rebound in confidence did allow corporate America to go on a spending spree. Yet, if it does not, then the backdrop for the average American will be one of only modest employment growth, a small rise in wages and a still-weak housing market. Americans still need to save more and spend less. This leads to the issue of energy and food prices. A year ago, rising food and energy prices added to inflation pressures across the globe, justifying higher interest rates in many growing economies. Now, rising oil prices appear more like a tax on global growth, eating into spending power in the US and Europe, and hitting many Asian economies at a time when they are slowing. The impact of oil prices on the global economy can never be underestimated. Rising oil prices are usually the biggest threat to continued global growth. There can often be a big difference between oil prices being driven higher by strong demand and by supply shocks. If strong demand is driving prices, then at least when oil prices rise, there is also increased spending and trade. In the past, demand-
driven spikes in oil prices would come late in an economic cycle. Now, it is demand from Asia and the Middle East that is driving oil prices up, and thus Western economies may not be in a strong position to cope. The more oil prices rise this year, the weaker the economic outlook will be in the West. This vulnerability is worse now, as supplyside worries surrounding Iran have led to a large risk premium, pushing oil prices up. Oil prices appear to have a firm floor because of strong demand, and a soft ceiling because of geopolitics. It is not just the West that watches prices closely. So, too, does China. Over the past year, China’s authorities have tightened policy in order to squeeze inflation. Their main focus appears to have been on property prices, yet they have also been keen not to see a wage-price spiral develop.
Thankfully, China has enough room for policy manoeuvre to cope with any setback, although that setback seems unlikely to occur this year. As the Chinese economy cools, one should expect further, gradual policy easing that allows for a rebound later this year. Over all, this should prove to be another challenging and interesting year for the world economy. In the immediate aftermath of the financial crisis, the world economy contracted in 2009, its first fall since the Second World War. In 2010, there was a strong rebound, with the world economy growing 4.4%, led by policy stimulus in the West, and by the strength of China and the emerging econo mies. But in 2011, the pace of growth slowed as the policy stimulus in the West started to wear off and as more economies in Asia and Latin America raised interest
“The impact of oil prices on the global economy can never be underestimated. Rising oil prices are usually the biggest threat to continued global growth.”
As has so often been the case in recent years, the Chinese authorities have handled things well. But the challenges are not getting any easier. China’s economy is cooling, not collapsing, and it is having a soft, not a hard, landing. At this year’s National People’s Congress, Premier Wen Jiabao sensibly cut the growth projection to 7.5% from 8%. Although I remain posi tive about China’s longer-term prospects, it is important to stress that, at some stage, China will have a setback. This should be seen as a feature of China’s likely development. As the economy grows bigger, it becomes harder to manage than in the past. Moreover, the need to switch from investment- to consumption-led growth poses many challenges.
rates to curb inflation. Last year, the world economy grew by 3%. This year, the good news is that there will be growth, but the challenge is that it seems difficult for it to be any higher than it was in 2011. Europe faces further chal lenges. America still has a debt mountain to climb. And many emerging economies have been slowing in the early months of the year. The economic story is one of a fragile West and a resilient East. Dr Gerard Lyons is Chief Economist at Standard Chartered Bank. For more information regarding Standard Chartered Bank visit www.standardchartered.com.my
EUMCCI Review 29
Coverage of the EUMCCI Quarterly Financial Panel Discussion and a main feature from IFBIM.