From Where will Salvation Come?

As mentioned in the previous blog entry, the recovery is likely to be very slow.  While the stock markets perform somersaults on the back of the massively cheap liquidity (Quantitative Easing) from central banks and future taxpayer-funded stimulus packages paid for by huge government debt, those people in the real economy who are desperate to find work are not feeling terribly happy.  Even those in employment may still be subjected to the 20%-30% pay reductions from employer moves to 4-day weeks or long periods of time off witnessed in the car manufacturing sector.

Sadly, as the public sector moves into redundancy mode after the election, with as many as 300,000 jobs under threat, as well as countless public sector contracts, the risks are not yet gone and the human misery will endure.  This will no doubt have a disproportionate impact on specific regions of the UK which depend more on government expenditure, with the North and West of England suffering more than London and the South East.

Unemployment and Govt Spend Regionally

So from where can we look for salvation in 2010?

From Europe: Well, we could look to Europe as it emerges from recession, but Europe’s sclerotic economy has underperformed most of the developing world and the United States.  And with Nicolas Sarkozy causing fury in London as he looks forward to strangling London’s financial services sector with his newly installed French Internal Market Commissioner, I think Europe is once again going to turn inward and become more protectionist against the evil forces of global capitalism. This does not make for a strong Europe.

The US: The US could be looked upon as a possible salvation, after all markets have rejoiced at the minor decline in unemployment – just 11,000 versus an expected 110,000. Sure, it may herald an improvement in the US economy.  But declining rates of unemployment do not a strong recovery make.  Fast and rising levels of employment, combined with growth in incomes and stable savings rates can offer the consumer (and even investment) led rise in consumption the world sorely needs to come out. In reality, the US is not the best prospect for the world economy, saddled as it is with debt.

US Job Losses to Nov 2009

US Job Losses to Nov 2009

The BRIC countries (Brazil, Russia, India, China): Well, Brazil is performing well in this financial crisis but it is not an economic powerhouse and has its own problems of an asset bubble as global investors borrow cheaply and plough money into the Brazilian market that is fuelling a surge in imports.  As such, interest rates look set to rise to 10% there.  Meanwhile, Russia has suffered during the crisis and is only gaining ground with the rise in oil prices from their previous lows.

Asia: It is Asia that must come to our salvation.  Indeed, even the members of APEC- Asia-Pacific Economic Cooperation – concede that this time around the burden must fall on them:  Singapore’s Prime Minister Lee Hsien Loonghas  said that, with weaker US growth, “somebody else has to spend more somewhere else in the world…[and t]his has to be in Asia.” – Nov 2009.  Indeed, APEC represents 21 of the world’s largest economies accounting for 44% of world trade and 40% of the world’s population.  The International Monetary Fund said last month that Asia would grow by 2.75% in 2009 and 5.75% in 2010, compared with flat to negative growth in the US and Western Europe, boosted by stimulus packages led by China – which has invested $586 billion in measures to grow their economy and build infrastructure.

That doesn’t mean you should rush to Asia for jobs.  The jobless rate across Asia has risen steeply during this crisis as western demand for manufactured goods collapsed.  But it does mean we should cheer the Asian economies on and support the US in its ongoing, though sometimes fruitless, efforts to persuade China to allow the Yuan to appreciate so that our industries can begin exporting to a truly enormous market.

The moral of the story – the fate of our economy largely rests in the hands of others much farther from our shores.

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