Reasons To Be Cheerful....

Despite all the gloom about the gloabl economy, there are, as Ian Dury might put, reasons to be cheerful as well. I explored a few of them in my Money Week columm this week. Here's a taster.....

It isn’t hard to be depressed about the outlook for the global economy over the next twenty years. After roughly two decades when everything seemed to go right --- inflation was tamed, technology boomed, globalisation opened up new markets – to many people it now looks as if everything is about to go wrong. Massive debts will overhang both the private and public sectors, whole industries look bankrupt, and protectionism is returning.
And yet, one lesson of the past hundred years has been that the surprises are more often on the upside. After a traumatic shock, the economy often does a lot better than most people thought it would. That was certainly true after the inflationary traumas of the 1970s, and it was true as well after both the First and Second World Wars. Could it be true again? Despite all the challenges the economy faces, there is no reason why it shouldn’t be. The consuming populations of the emerging markets are about to double, the developed world has huge hidden reserves of labour that could be put back to work, Africa could be re-integrated into the world economy, and technology could yet re-ignite global demand. We might yet be pleasant surprised by how well the world economy does in 2010-2030.
Looking back, the 1990s and 2000’s will no doubt go down as a uniquely benign period in global economics. The Bank of England governor, Mervyn King, took to referring to it as the ‘NICE decade’, standing for ‘non-inflationary consistently growing’ and that pretty much summed it up. After the oil shocks and recessions of the 1970s and 1980s, just about everything came good. Inflation was successfully tamed. Governments around the world embarked in programmes of deregulation and privatisation. Communism collapsed, propelling lots of new countries into the free market system. The growth of computers, mobile phones and the internet spawned huge new industries. It retrospect, it looks like a prosperous golden age, in which all we had to do was worry about spending wealth, not creating it.
In the wake of the financial collapse and global recession of 2008/2009, it is easy to imagine that is over. The banking authorities warn us that any return to growth will be a long hard slog. Debts are massive in both the private and public sectors. Borrowing will have to slow down and taxes will have to rise. The world is awash with excess capacity, destroying profits for a generation. Populations are aging, creating huge demographic challenges. Resources are scare once again, and it may not be long before we have inflation to contend with as well. Charles Bean, the deputy governor of the Bank of England, already refers to it as ‘the great contraction’, and that is a view shared by many policy-makers. They don’t expect the good times to return soon.
And yet, the aftermath of a traumatic shock to the global economy is often better than people imagine. “The periods after the two world wars in the twentieth century, the inflationary 1970s, and the emerging markets crisis in the period from 1997-2000 were all thought likely to be the gateway to stagnation, but economic performance, in the end, surprised on the upside,” argued George Magus, senior economic adviser to UBS in a recent analysis.
We may well be surprised again. Whilst there is no point in ignoring the problems, there are reasons for optimism as well.
First, over the next 30 years, the world’s population is expected to grow by another three to four billion people. Most of them will be in the emerging economies, so whilst Europe and the US may have a demographic crisis, those economies will still be thriving. Many of the big developing economies – and in particular China and India – will have a rapidly expanding middle-class. They will have reached the point where they stop just buying necessities and turn into affluent consumers. That could be one of the big drivers of growth in the next 20 years.
Second, in Europe, and the US lots of people don’t work. In the UK, for example, around five million people are on incapacity or unemployment benefit. The same is true in many other countries (even if they have other ways of disguising the unemployment). People still routinely retire at 55 or 60 even though they may well live for another thirty years. A combination of welfare and retirement policies have pushed down the percentage of the population that works. If that starts to change – and the pressure that public finances are going to be under in the next decade means it will probably have to - then it will release a huge number of people into the labour force. Since the number of workers is one of the main determinants of long-term growth, that would give the economy a big boost.
Thirdly, a whole continent was excluded from the economic boom of the last decade: Africa. Whilst the rest of the world got richer, Africa got poorer. That doesn’t make any sense – the continent has too many valuable raw materials too be ignored. At some point, Africa will be re-integrated into the global economy, unleashing yet another driver of growth.
Finally, don’t discount another technological revolution. Mobiles might have reached saturation point. The internet might not be able to grow in the next decade the way it did in the last. But, by definition, we have no idea what will be invented in the future – if we did we’d already be making it. With the world’s population rising, with education improving in the developing world, it would be very odd if the world’s inventiveness slowed down. It is much more likely to speed up – and all the new stuff that gets invented will create new industries.
None of it may happen, of course. Yet amid all the gloom, it is worth remembering that the global economy has a great capacity to bounce back from adversity. Undue pessimism can be just as expensive for investors as exaggerated optimism. Growth has surprised us before – and it may well do again.