Each year the Cayman Business Outlook attempts to highlight some of the key trends influencing our economic future. Although pessimism reigned, delegates were told that the world has always been in crisis by speakers who had very different views about who is really in decline: The US, China or Europe?
Self-confessed doomsayer Anwer Sunderji, chairman of Fidelity Group and host of the Cayman Business Outlook, set the scene with his prediction: “The outlook for the global economy in 2012 is clear, but not pretty.”
A continuing recession in Europe, limited growth in the US and a sharp slowdown in China coupled with tensions in the Middle East and high oil prices will constrain global growth, Sunderji concluded.
US debt constraints will mean that the US can no longer be counted as the consumer of last resort, with all the consequences that this entails for economies such as China, the Bahamas or Cayman, which typically depend on the strength of US consumers.
Keynote speaker George Friedman, founder and chairman of Stratfor, tempered Sunderji’s pessimism by asking “when has the world not been in crisis?”
He mentioned the conditions of the 1970s, when US unemployment was at 11 per cent, inflation at 12 to 15 per cent and the US had just lost a war in Vietnam to remind the audience “how bad things can get” and to put into perspective how bad things are today.
Friedman, who believes the US will dominate the 21st Century in every arena economically, politically and militarily, noted “the world has believed the US is in decline since the 1930s”, when in fact European nations and particularly the UK were truly in decline.
Friedman said the US assumed the role as the only dominant global power only by accident when in 1991, following the break-up of the Soviet Union, for the first time in 500 years there was no European power with a balanced political, economic and military influence on a global scale.
In his view the 2008 financial crisis has now become a geopolitical crisis of the first order for Europe and China in particular.
This balance of power is not going to change significantly, he argued, because the recent crisis in Europe has shown that the idea of a “United States of Europe counterbalancing the United States geopolitically is not going to happen” and China will encounter economic problems in dealing with poverty, inequality and a deteriorating competitiveness of its industrial base, which has already weakened the Chinese banking sector.
The European crisis
Europe experienced a financial crisis which manifested itself as a sovereign debt crisis that may still turn into a banking crisis. However, these problems are really just a reflection of the deeper crisis of Europe’s “inherently irrational trade regime”, Friedman said.
In his view Europe’s problem is the competiveness of Germany, the world’s second largest export economy, which forces smaller countries like Greece to be net importers, when, at the stage of their development with lower average wages, they should be net exporters.
Germany has to export to maintain social stability because its industrial base is too large for domestic consumption. Meanwhile, German banks lent to periphery countries to boost German production, deepening the crisis, he said.
Sunderji concurred saying the end of the euro is a real possibility. “Germany finally achieved the dominance of Europe without firing a single shot and it is uncertain whether the debtor countries of Southern Europe will be able to stay the course of austerity and German style economic redemption, an economic discipline which is likely to set them back decades.”
Ultimately the European crisis will crystallise in a conflict over sovereignty, said Friedman.
The disparity between the political and media elite which have bought into the European idea and the euroscepticism of the wider public will show that sovereignty really matters, he argued.
“Where that goes is the great mystery. But this much we know: the idea of a United States of Europe counterbalancing the United States geopolitically is not going to happen. The idea that Europe is going to have a single foreign policy is not going to happen. The only question is how far apart will the European states drift and how far will sovereignty become a national issue?”
Friedman also dispelled the notion that the BRIC countries, “which have absolutely nothing in common other than a cool name”, can overtake the US economy.
The combined GDP of Brazil, Russia, India and China would have to grow by 25 per cent to match that of the United States. “Those who say China can economically overcome the United States are arithmetically challenged,” he said.
He also put cold water on the accuracy of Chinese growth statistics, saying the Chinese have an extraordinarily efficient mechanism of knowing their growth rate two weeks after the books have closed. “Therefore we know this much: The Central Committee met and they determined what the growth rate was, they published it and Goldman Sachs announced ‘My God China is a miracle’.”
Yet of the 1.3 billion Chinese, 600 million live in households earning less than $3 a day and another 440 million live in households earning between $4 and $6 a day, meaning that “China is an extraordinarily poor country”.
The China that we think of consists of only 60 million people, which live in households earning more than $20,000 per year, Friedman noted.
The Chinese government’s biggest concern is therefore unemployment, he claimed, which could lead to civil unrest among the poorest of the population.
Because China, like Germany, has to export to keep unemployment in check, it will be harder hit by a global recession than the US, he said.
Moreover, Chinese exports are no longer competitive. “At this point the Mexican wage rate is substantially cheaper than the Chinese wage rate within the requirements of production.”
Friedman noted a global dispersion of baseline production out of China to other countries as large US retailers like Walmart source products from different regions in the world.
Cutting costs further would be difficult for Chinese exporters, given their current profit margin of 1.7 per cent, which if true means that exporters are “basically exporting at cost”, he said.
“China is an amazing story but the idea that this is the eternal growth machine flies in the face of what we know about business, which is the faster you grow, the more inefficiencies you create. You must slow down to clean out those inefficiencies. If you don’t, you pile them up and they become more difficult to deal with,” Friedman concluded.
FT journalist Gideon Rachman disagreed with Friedman stating he was “more negative on Europe, more negative on the US and more positive on China”.
“People can palpably feel that the US is under challenge and Europe is even worse,” he said.
Rachman believes the world is entering into an age where international relations and international economic relations are more adversarial and more conflictual. Specifically the relations between the two largest economies China and the US are going to change, he predicted.
Given that China is effectively the only plausible challenger to the US as the global superpower and the differences between the political systems of the countries, it is surprising how well the two got along, he said. But in the future relations will become more adversarial in the areas of economics, diplomacy and military.
Unlike Friedman, Rachman does not believe that China will be another Japan, first hailed as a new superpower after posting impressive growth rates and then stagnating for decades.
Despite the questionable process, China’s growth rates are real and it is likely to overtake the US as the world’s largest economy in 2018 or sometime shortly after. Rachman said this is going to be a “massive psychological moment” and China will subsequently be perceived as more threatening.
In international relations China’s vote is already crucial in dealing with Iran and China was able to block US interests in the climate change talks.
Militarily China is still a far way off the United States but there is a growing sense in China “that things are going their way and the US has to tread more carefully”, Rachman said.
Like Friedman, Rachman sees 2008 as a pivotal year and turning point for how globalisation is regarded. He retraced the evolution of globalisation, set out in his book the Zero Sum Game, beginning with the opening up of China in 1978, followed by an age of optimism characterised by a coherence around a global capitalist system.
Since the financial crisis, however, the notion that globalisation is a win-win has become more open to challenge and a zero sum logic is taking hold. According to this logic one country’s gain is another country’s loss and not all countries will benefit from globalisation and openness. This is providing a fertile ground for tensions and conflict, Rachman argued, and trade imbalances and sovereign debt crises could lead to new trade barriers.
Rachman cited Europe as one of the examples for the spread of the zero sum logic. The “brilliant idea” that Europeans could unite economically and create investment, interdependence and prosperity for everyone worked very well for fifty years, “but in this new environment that logic has gone into reverse”, he said.
While Rachman could not see a way out of this political trap, he expects “a long slow grind of austerity in which people’s prospects get worse and worse”.
And because Europe is still for the moment the world’s largest economy collectively and the European banking system is absolutely integral to the international financial system, a meltdown in Europe would mean a global meltdown.
With elections in France, the US and Russia and a change of power China in 2012, these countries will be consumed by internal politics making global politics this year even more unpredictable.