Renewed political uncertainty in Greece, together with rioting on the streets of Athens, have put the eurozone crisis back at the top of the agenda. It is, as I said recently, the biggest threat to the world economy over the next 12 months.
It is not the only worry. Sir Mervyn King, freshly knighted for the Mansion House dinner, told assembled bankers “failure to tackle the imbalances during the seven years of plenty before 2007 threatens seven lean years thereafter for at least part of the world economy”.
That leanness is evident in data for America on jobs, retail sales, house prices, consumer confidence and other variables. Stephen Roach of Morgan Stanley says America is a nation of zombie consumers.
The failure of the US economy to maintain strong growth is interesting. Until recently an apparently stronger US recovery, in the absence of tax hikes and spending cuts, was a stick to beat George Osborne over his fiscal tightening. This line of attack has been killed off, for now.
King was careful in his choice of words. When he talked about “part of the world economy” he meant the advanced world: Western Europe, North America, Japan and some other parts of Asia. His seven lean years did not extend to China, India, Brazil, Russia, Indonesia, large parts of Africa, Latin America and so on. In this recovery, the emerging world is the world’s locomotive; where most of the growth is.
That is why we should be worried if fears over the global economy extend to slowdowns in these countries. Ivan Glasenberg, chief executive of Glencore, the controversial commodities giant, warned last week that the firm was experiencing a significant “pullback” in demand in China.
The OECD (Organisation for Economic Co-operation and Development) reports that its leading indicators point to “a possible moderation” of economic activity in China, a slowdown in Brazil and China and the first signs of slower growth in Russia.
All four of the BRICs’ economies, in other words, are showing signs of slowing. The locomotives, it seems, are running out of steam. How worried should we be?
There is often a big difference between fears and economic reality. While fears have persisted since the worst of the crisis, the world has enjoyed a strong recovery.
Last year, according to the International Monetary Fund, the global economy grew 5% and world trade 12.4%. The contrast with 2009, when the world shrank 0.5% and trade slumped 10.9% was striking.
The IMF, in its April forecast, expected good growth to continue, roughly 4.5% this year and next. More uncertainties have crept in but Royal Bank of Scotland, in a just-released forecast, sees global growth of 4.1% this year and 4.4% in 2012.
It also suggests we should put the Chinese and Indian slowdowns into perspective. Both grew more than 10% last year, India shading it at 10.4% versus China’s 10.3%. India’s slowdown this year will be more dramatic, to 7.8% versus China’s 9.7%. But 8% growth is still highly impressive.
There is a health warning on all forecasts, but more particularly when crises are swirling around. The IMF’s July 2008 forecast update, for example, two months before the collapse of Lehman Brothers, predicted 4.1% global growth for 2009.
Why is the global economy slowing at all? That is not hard to explain. The early stages of recovery are steep; once economies reach cruising altitude things steady.
On top of that fiscal policy is being tightened in most advanced economies, while monetary policy is becoming more restrictive – interest rates are being raised – in many emerging economies. That is in response to another growth-reducing factor, soaring commodity prices, though they show signs of easing.
There is a lot of evidence that the Japanese earthquake and tsunami, with its effects on Japan and global supply chains, has resulted in a temporary hit to growth.
All this suggests fears over the global economy are probably overdone. The slowdown is largely due to temporary factors. A blow-up in Greece and the contagion that would spread is the risk.
As Holger Schmieding, chief economist at Berenberg Bank, puts it: “Greece is tiny: 2.5% of Eurozone GDP. What matters is the risk of contagion to much bigger economies such as Spain (11.6%) or Italy (16.8%). A market panic … could potentially trigger a Lehman-style chain reaction with major damage to the European economy.”
On the other hand, if the European Central Bank and member states allowed their squabbles to result in another major accident it would be unforgiveable. The global recovery is real, even if it has taken a bit of a breather. But the fears, the tail risks, are real too, and have consequences.
This brings it back to Britain. One of the puzzles for Treasury officials relates to the strength of private sector jobs’ growth but the weakness of business investment.
Figures from the Office for National Statistics show private sector employment has risen an impressive 520,000 over the past year and 562,000 since the recession low point in the final quarter of 2009.
Business investment, in contrast, fell by 7.1% in the first quarter and was 3.2% down on a year earlier. The figures are prone to revision but the implications appear clear. Firms are willing to hire but not invest.
Some of that can be explained by the surplus capacity left over from the recession (though investment recoveries are normally very strong in spite of that factor). Some of it may be explained by the availability, or lack of it, of finance.
Most of it, I suspect, is explained by the fear factor. Though the world has recovered, firms are unsure about whether it can last. Those fears over global recovery are not just regularly battering the stock market. By affecting the behaviour of firms they threaten to become self-fulfilling.
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
This post originally appeared at David Smith’s EconomicsUK and is reproduced here with permission.