The MT Diary

My globe-trotting search for a thriving economy that might bring the West salvation.

by Howard Davies
Last Updated: 31 Aug 2010

Well, it happened. The economy fell off a cliff in September, and those who tried to stop it found themselves reaching out to catch a falling knife. The IMF has sharply reduced its global growth forecasts since the financial market meltdown.

Maybe Mervyn King is right that if Lehman's hadn't collapsed there would have been some other trigger, but the crisis of confidence certainly took hold at the same time. The US and the UK are now certainly in recession, and there are other places, too, like Ireland and Iceland, where the economy is contracting sharply. Hungary and Ukraine have gone bust. New Zealand was technically the first to get the red card - appropriately, as the sun rises there first. But until now there has been a hope that China and other emerging markets would take the strain, and prevent a global recession. The optimists argue that the Chinese economy, in particular, is decoupled from the West, and will sail on regardless.

So this month I went on an exhaust- ive and exhausting search for good news on MT's behalf. After all, we don't want to wallow unnecessarily in Spenglerian gloom, causing our worst fears to be realised.

First stop, Beijing, where in 2007 the economy grew by about 11.5 %, with an extra Olympic boost in the first half of this year. So on the surface, it is still full steam ahead on the Yangtze.

Or is it? Factories devoted to US exports are closing left, left and centre. Six thousand toy plants have shut down, we're told. This figure seems implausible - just how many Barbie dolls are made each year? Let's interpret it as 'a lot'.

The official forecast for this year has now gone down to 9%. Down to 9%? I hear you ask. Well, yes. But 8% is generally seen as the number that China needs to avoid rising unemployment, which could have serious social consequences. The economy requires 13 million new jobs each year to keep employment stable. So the Chinese authorities are undoubtedly worried.

Some of those who have tried to argue that the direct effect on China will be modest, as exports in the US and UK are a small share of GDP, are missing the point that Chinese society is now very porous. China tries to prevent some news from getting in, but it doesn't ban the Dow Jones or the FTSE. Chinese entrepreneurs know what is happening on Wall Street and react accordingly. The government has responded aggressively, with a big boost in infrastructure spending announced in November. But the import content will be quite low. So apart from a few commodity producers, Western companies will not benefit much.

Dubai, surely, is the exception to this rule. The pavements of the Gulf are slick with oil, and their sovereign wealth funds (SWFs) are public-spiritedly recapitalising the West's banking systems. The public spirit is nurtured, in the case of Barclays, with an extravagant return. Few would dispute that if you need more capital, you hop on an Emirates flight.

The Gulf, though, is not immune. Some of its SWF investments have not been stellar choices, and their portfolios are looking a touch anaemic. The property market, especially in Dubai, is distinctly soft. Goodness knows how many new five-star hotels are under construction. Whatever the number, it must be too many.

Friday night in Dubai is still quite the scene, with near-naked lumpy English girls, and not so lumpy Russian ones, tricked out and tanked up in hotel bars for a night on the town. It has a fin-de-siecle feel to it, which is ominous with 92 years still to go.

Then it was back out East to run the rule over the Switzerland of Asia from the perspective of Raffles Hotel. Singapore was quiet. The economy contracted last quarter at an annual rate of 6.3%: quite a lick. They are getting on with addressing the problem, in a very Singaporean way. The airline has agreed a new deal with the pilots, which is essentially a pay cut. Try selling that to BA as a response to the sharp fall in traffic. Singapore Plc has proved disciplined and resourceful in the past, and will pull though again, though clearly not without a struggle, and the government thinks times will be tough.

Next stop - Russia. The Russians thought they could cock a snook at the rest of us, if the Russians have snooks left to cock. The stock market's reaction to their Georgian adventure gave the lie to that. The falling oil price has cut cash inflows sharply, and foreign capital is now being withdrawn. It turns out that some of the oligarchs themselves were highly leveraged. Those Corfu yachts were on tick. Perhaps the truth of the mysterious meetings with Osborne is that Deripaska was asking him for a loan.

Back home, the credit crunch is now of concern even to the Royal Family. Not because of their leverage: I suspect the Queen is one of our few remaining triple-A credits. The mortgage on Windsor Castle must have been paid off by now.

Her Majesty came by the LSE to open a new building the other day, a super academic palace in Lincoln's Inn Fields. As she toured the floors, one of our professors showed a few slides on the crisis, revealing how losses arose in the first place, and how they are now affecting households here - and indeed in emerging markets. 'Awful' was the regal verdict - which, as a one-word summary, is hard to better.

Howard Davies is the director of the London School of Economics.

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