As the hoofbeats of global recession grow deafening, only a few economists can truthfully say ‘I told you so’. Jim Walker, Scots founder of Hong Kong-based consultancy Asianomics, is one of them. He warns that the powerhouse economies of China and India are about to be engulfed.
OF MONTHS MATTER A ONLY ago, any idea that a slowdown in China or other high-growth economies could have any connection with the fortunes of the Scottish banks would have been laughed to scorn. That was when the theory of "decoupling" - the rising East's supposed disconnection from the West - still had currency. Now, it seems the fates of HBOS and RBS mark an important staging post on a road that leads inexorably eastwards.
Let us first ransack the alphabet to determine the shape of the current recession. Over the coming months there will be debates about hard and soft landings (that is starting in China, now) and whether this recession - US, Asian, global, just take your pick - will be European, Japanese, British, V-shaped, U-shaped or W-shaped.
The current recession will feel longer and deeper than anything that has occurred in the West since the 1930s. That does not mean that it will be like the Great Depression, but it does mean that it will be much more like Japan's experience of an L-shaped recession through the 1990s. An initial sharp downturn (where we are now) will be followed by stuttering and shallow recoveries which, in turn, will slither back into slumps. The main drag on growth for the next few years will be de-leveraging of household balance sheets in the US, UK and some parts of Europe and de-leveraging of financial-system balance sheets across the world as banks and other credit-creating institutions shrink back to a more normal and sustainable size.
Another key feature that will keep the US economy soft throughout next year is rising unemployment. With the unemployment rate already at 6.1% (close to the peak 6.3% of the last recession) and the credit contraction only just beginning, we can expect an eventual unemployment rate of 9% or higher. This will ensure that the housing market - the epicentre of the credit losses - will take much longer than anticipated to recover. Essentially, unemployment will cause a third leg down in the housing market. The UK can anticipate unemployment rising towards 7%-8% over the next couple of years as well.
It is unlikely that they will experience any recovery in the near future. GDP growth this year will be in the range 0-0.5% and close to zero in 2009. We expect the European and Japanese recessions to be every bit as bad as that experienced in the US, although for different reasons.
Elsewhere, economic activity has held up reasonably well in the first half of 2008 on the back of the momentum growth in China and India, as well as the windfall gains in commodity prices that have breathed life into Latin America, Russia and the Middle East. But none of that will last for long. Why not? Why was the "decoupling story" - the theory that emerging economies were now immune from shocks from mature economies - always a non-starter? Simply because all of that growth and price appreciation was tied to the copious amounts of credit churned out by the Western financial system over the last seven years. Independent growth in China, India and the emerging markets is a myth. Independent appreciation of commodity prices and asset prices in these economies is a myth also.
The leverage-revulsion going on in the financial system at present is like the tsunami that follows an underwater earthquake. It has already demolished the US housing market and taken a heavy toll on the peripheral European property markets.
It has enveloped the Western world's financial system and it is now making its way around the globe to China, Asia and emerging markets generally.
As growth slows, and we are only a few months into the vertical part of the L, we fully expect commodity prices to collapse. This will give some relief to manufacturers, but it will be too late. Our expectation is that emerging market demand will wither and die, in the short term at least.
If you can't recognise why or how the crisis has emerged, how can you hope to have the solution?
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with thanks
be and make
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