As we enter the dawn of a new year, all attention will be focused on the coming general election and, for some of us, the paucity of ideas battling for votes from a badly informed electorate. As things stand, it is largely a competition between tweedledee and tweedledum, although the recent injection of a broad, if under-articulated, idea of privatisation has raised its head.
However, even this glimpse of an ideological difference has been crowded out by the yahboo background noise of party humbug, rather than a rational discussion of the notion that firms owned by the private sector are in themselves inherently better managed and more efficient than those held by the public sector or social enterprises. Such closed mindedness also acts to shutdown debate, the arguments become irrelevant, as by definition people are either for or against the idea under discussion.
Now, as I have said here before, the world is entering a new phase in which the old economic assumptions are now redundant and the new global economic (and military) power will be centred in the early part of the 21st century in Asia and to some extent, Latin America. Therefore to understand what is taking place and the possible outcomes, one needs to read the runes carefully. For a little island state, proud of its independence, careful observation is more important now than at any point in our history.
As befits its status as the most powerful economic and military nation in the world, everyone is obsessing over the so-called fiscal cliff, the description given by Ben Bernanke to the series of tax increases and spending cuts arrangements left in place for President Obama by George W. Bush and which come to an end at the end of December. In global terms, these developments are not as important as some seem to suggest; it is not economic Armageddon. Unless the Republicans and White House come to an arrangement, it is conceded that the crisis may tip the US back in to a recession. (see: the Congressional Budget Office: “The Economic Effects of Policies Contributing to Fiscal Tightening in 2013.
If the projected fiscal cliff deficit cuts go ahead, leading to a reduction in GDP of 3.5 per cent, and with the projected two per cent growth, the reality will be a decline in US GDP of -1.5 per cent, plunging the economy back in to the much talked-about recession. But, as I have already said, the world has moved on and the US economy accounts for about 25 per cent of global GDP or 21 per cent according to the IMF), a smaller portion of the global economic drivers than it did five or ten years ago. Even so, it is unlikely even the Tea Party wing of the republicans will like to be held responsible for plunging the economy in to a death spiral, and it is very likely that at the eleventh hour, a compromise will be reached; also, American consumers are back spending money, and this too will have an impact on the wider economy. This short term belt-tightening should see the US, by 2020, become self-sufficient in energy with its shale oil and gas production, according to the International Energy Agency. Further, US banks are holding about US$1.4trn in liquidity with the Fed, and, unlike the UK, banks have been extending their lending to households and businesses.
On the other hand, shadow banks are experiencing shrinking balance sheets, falling from about US$14.8trn at the fading end of the credit boom in 2008, to US$9.9trn by the end of Q3 2012. Equally, household debt to income ration has been reduced from a peak of 134 per cent to just over 112 per cent at the end of Q3, 2012, with incomes set to grow by three per cent in 2013, above the inflation rate. In the Eurozone, the economic cycle is at a totally different stage, but predictions of the collapse of the economic area and the exit of Greece and Spain, are grossly exaggerated. This is inspite of the extra-ordinary sovereign and bank debt, and the weakening of the German economy, the main driver of the Eurozone, almost all the troubled economies are now showing signs of stabilising. About euro20bn of Greek debt is maturing in 2013, compared with euro100bn in Spain and euro300bn in Italy. Sometimes it is forgotten that the success of the export-led German economy depends on three key exports: all luxury car s – Mercedes Benz, Audi and BMW vehicles. German high-end engineering cannot sustain the economy, outside the Asian rush for these top brand cars, and German consumers are unlikely to take up that slack (Germans do not spend), so sooner rather than later, Germany will have to find alternatives exports.
To all extents and purposes – and despite the predictions by the Centre for Economics and Business Research that the US, China And Japan will remain the top three economies over the next ten years – we can dismiss the long period between the 1960s and the turn of the 21st century as the high point of Japanese economic dominance, second only to the great US.
I do agree, however, with the CEBR that by 2022, China’s economy will be about 83 per cent of the US and rising, from its current 53 per cent. The Asian financial collapse, the recent global banking crisis and the two decades of stagnation have combined to anchor any hopes Japan had of economic growth firmly bouncing along at the bottom. As it struggles to recover, it will continue to face the growing military and economic might of China for regional dominance.
Further, its post-war dependence on US military protection will be in vain, although we cannot rule out a nuclear war between the US and China, and, in any case, an intense trade war between the US and European Union. The US mind-set, as we have seen from the Connecticut school massacre, is to shoot first and answer questions after. This domestic psychology flows over in to America’s approach to the rest of the world, from legislation with tentacles that stretch all around the world, to the assumption that any offence or alleged offence committed on the internet becomes automatically an alleged crime for which the US can demand that the suspect be extradited.
In the UK, the government is now estimating that its fiscal squeeze will last until 2018, so our biggest tourist market will have further belt-tightening for another five years. Added to this is that British households have one of the highest debt to income ratios in the developed world, so with high debt and falling incomes, and with the likelihood that unemployment will grow as many of the British ‘zombie’ companies collapse, there is unlikely to be a significant reduction in this level for at least another five years.
In the emerging markets, growth has slowed from about 11 per cent seven per cent in China with inflation at two per cent, and in Brazil dropped from 7.5 per cent to two per cent. The continuing war in Syria runs the risk of a regional conflagration if Israel and Turkey become involved, but as long as the Jewish state and the secular Muslim neighbour keep out of the civil war, then the only state to be destroyed will be Syria.
How this new reality is going to be played out in Barbados is anybody’s guess. There is no publicly available information from the government or the central bank to suggest that our key policymakers are on top of this global, regional or national economic crisis and have sound ideas for steering Barbados clear of the choppy waters. Ordinary people are left with the impression that there is a level of petty party fiddling while Rome continues to burn.
Whatever the outcome, Barbadians will have to dig deep to maintain the collective standard of living they now enjoy, that which they enjoyed during the boom years on sovereign and household debt, and the national fear of even worse to come.
As we go in to a general election year, serious questions must be asked of all those who set themselves up to be our political masters. Personal friendships and political allegiances must be secondary.
As you reflect on this, have a Prosperous New Year.