Since I last blogged back in June, the flow of bad economic and financial news has turned into a torrent. Banks have shed jobs, markets have fallen, confidence in governments is even lower than before, the ECB has acrimoniously lost its German board member and economic forecasts have been cut by private forecasters, the OECD and just about everyone else and Greece seems even closer to default. Oh and the US lost its AAA credit rating from one rating agency (but not the others).
I like to try to see the optimistic side of any situation so here are a few thoughts as to why there is still hope.
The fundamentals for global economic growth are good. Simplifying a little, growth requires labour, capital and technology. There is plenty of each. Even as wages rise in China, there are many millions of people who can be brought into the world economy and offered a more prosperous future than tilling the fields. Although McKinsey warns of a shortage of capital in the medium term, at present there is still a “savings glut” and it is largely a lack of confidence which is impeding investment. And the march of technology shows no signs of slowing down. There are many wonderful new developments in the pipeline in biology, computing, material science and nanotechnology. Aside from the distinctly non-trivial barrier of climate change (remember that?) the world has all the ingredients for a long period of positive-sum economic growth.
The US fiscal position is not actually that bad, for another decade or so. The US doesn’t have an intractable problem of public finances, it simply (ha) has a problem with its health system, which is overwhelmingly the reason for the long term predicted deterioration in public debt. That can and will be fixed, though it will be a hell of a political fight to get there. The US still has scope for additional fiscal policy to fill part of the demand gap that is currently holding back growth and job creation.
While it looks a lot like the US is entering a dreaded “Japanese” lost decade, that decade wasn’t so bad for Japan, which has continued to grow in real terms, keep unemployment low and remain a highly civilised and prosperous economy. The US political system looks like a total mess at present but that same system has found ways to solve other big problems in the past and eventually it will again, though I admit it’s hard to see quite how intransigent Republicanism will change. Perhaps when a Teaparty-friendly presidential candidate is destroyed at the polls, as every pollster seems to think will happen. Remember what Winston Churchill supposedly said: “The Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”
Amid the increasingly alarmist articles in the US foreign policy press about war between the US and China, it’s important to remember how many interests the two share. Both depend on an open economy, free trade and the easy movement of energy and other raw materials round the world. Both, but particularly China, would suffer from any breakdown in the system which the US has sponsored and to a large extent protected since the second world war.
While the outlook for Greece looks pretty dreadful on any plausible scenario, the rest of Europe can fix itself when it finally decides to. It may take a real crisis to do it but the Germans will eventually do what it takes to stabilise the European economy (perhaps involving another bailout of the banks which will otherwise go bust when Greece defaults). The German and French economies are in fundamentally sound shape, as is the UK and at least northern Italy. That’s quite a lot of GDP.
From a world perspective, the gradually shrinking importance of the richer economies means that we are increasingly in a world where no one economy can screw things up. Growth in not just China but India, Brazil, Indonesia, Mexico and other medium sized economies means that the US and Europe can afford some degree of set back without pushing the whole world into recession. And that means any US or European recession will be shorter. There are some big longer term questions about how those currently rich countries will keep their people in the manner to which they’ve been accustomed ten or twenty years from now but remember that economic growth is not a zero sum game.
So the short term outlook is definitely worrying, but unless our leaders are exceptionally inept, we should see a more optimistic outlook in 2012.