The MT Diary

Why Pigs won't fly; oil boost for Russia; Singapore hung up on Lib Dems; Aussies shift.

by Howard Davies
Last Updated: 31 Aug 2010

Unusually, football made an appearance at Davos this year. The last-night party was hosted by South Africa, which 'launched' the World Cup in some not very clear way. It was a lavish bash, with crocodile and ostrich steaks for all. There was a team of astonishingly tall rainbow-nation models to add glamour. How many of them were wives of President Zuma was not revealed - and he left before the party got going.

The conference debates lacked a strong theme this year. The tone should have been positive, as the global economy has struggled up off its knees, but the Obama administration's lack of momentum, its confusing launch of the Volcker rule, and the travails of Greece put a damper on proceedings. The markets began to be jittery, and have stayed that way since.

'Escape velocity' was the jargon phrase of choice this year. Does the economy have it, or is the recovery still attributable to the booster rockets of huge fiscal and monetary stimuli? As and when they burn out, will we fall back to earth?

If a consensus on these questions was found, it was that we need not worry about China and India, but that European recovery is much less firmly established. Southern Europe is especially troubled. We cannot expect the Pigs (Portugal, Italy, Greece and Spain) to fly while their prime focus is on deficit reduction. The UK is also an honorary PIG, without the sunshine and cheap wine. It is not a good place to be. I'd rather be with a few wives among the crocodiles.

The world's centre of economic gravity is shifting eastwards at a great rate. It is currently in Russia, marching on towards Siberia. So this month I followed it.

Russia had a horrible 2009. GDP fell by 8% or so, as the oil price slithered. Now, with all commodity prices rising, the Russians are on the up again, a fact that is not unrelated to their growing assertiveness in foreign policy. Moscow is, again, one enormous traffic jam, until you get to the freeway leading to Domodedovo.

For me, even that road was slow - indeed, I spent 20 minutes at a standstill. My car was flagged down and the driver was arrested and shut in a police van. Meanwhile, I sat alone in the middle of a snowy birch forest, wondering if I should make a run for it, zig-zagging through the trees. That's what Daniel Craig would have done, I'm sure. But just as I was giving up on my flight, my grumpy driver finally emerged with a receipt for a fine. Since his English was as good as my Russian, I didn't get to the bottom of the problem. Maybe the Moscow police, like British universities, have budgetary issues.

On to Singapore, which has bounced back remarkably, riding the Chinese tiger. There all the talk is of bubbles and booms, of overheating and unsustainable carry trades. How unlike the home life of our own dear chancellor.

The Chinese may have overdone the stimulus, which was effected primarily through a massive expansion in bank lending. It held the growth rate up, but now property prices are rising fast, and not just in the coastal cities. Fortunately, the direct controls that allowed them to switch on the money tap allow them to turn it off as well. Reserve requirements have been lifted and interest rate rises are likely soon, but the timing is delicate, just as deficit reduction is here. If they move too fast, we might notice the impact on confidence here.

In the Far East, they are surprisingly interested in our forthcoming election, and the consequences for sterling and the gilt market. They don't like the sound of this 'hung' parliament story one little bit. I explained that we don't plan to string MPs up, even though some may deserve it for their expenses frauds, and tried to suggest that it ought to be possible for a coalition to reach agreement on spending cuts.

But who knows? We haven't attempted a coalition for about 80 years (except in wartime). There would be a lot of pushing and shoving before a deal was done, and time may be short. So foreign investors are enquiring about the details of the Lib Dems' spending plans - not one of my Mastermind subjects, I fear.

Finally, to the lucky country. Aus tralia has lived up to its name in this recession. Indeed the Aussies avoided one altogether and expect growth of more than 3% this year. But they too have elections on the horizon. (They are never far away, in fact, as their parliaments last three years at most.)

Kevin Rudd should win again - the Liberal opposition had a big falling-out over climate change and dropped its leader, Malcolm Turnbull, who may now vote with the government. But the Copenhagen failure, embarrassing fake claims about melting glaciers, and even the East Anglia e-mail controversy are contributing to a shift in public opinion. The climate change sceptics are resurgent: I had a copy of Nigel Lawson's book thrust on me at a Sydney lunch.

It's still unclear whether we will get into Australia's happy position any time soon - with healthy growth and the luxury to think about issues other than the state of the banks and unemployment. But when we do, we may find the comfortable cross-party consensus on climate change coming unstuck. I forecast that the popular politics will turn out to be very difficult when measures that really affect behaviour are introduced. A sweltering summer might help.

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

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