An Evening with an Inspirational Economist
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Halfway through Jim O’Neill’s talk to the Keynes Society last night I realised properly for the first time in several years why I teach economics. There are few subjects that happen in real time, in internet time – and few where there are so many constantly changing issues to confront and events and trends to make sense of. We live in utterly fascinating times, and lying just beneath the surface of so many of the critical economic and geo-political debates is a seismic shift in the global economy’s Teutonic plates. The rise of the BRIC economies and the Next eleven (N-11) was the subject of an inspiring talk by the Managing Director & Head of Global Economic Research at Goldman Sachs.
Goldman Sachs is more pessimistic than the consensus on prospects for economic growth in the world economy in 2008 and 2009. But even if the pace of growth slows to 3.5% this year, that would still be a pretty healthy rate of growth for the world as a whole and well above the long run average growth of the last twenty five years.
There is a real risk of a recession in the United States – and the bulk of the story is down to the collapse in house prices and construction. This is a major demand shock for the world’s biggest economy and is the prime factor behind the current global credit crunch.
The Fed Reserve has been aggressive in cutting interest rates and the Bush fiscal stimulus will also help. The Fed is likely to continue cutting rates providing that inflation expectations remain anchored at or around the 2.5% - 3.5% mark. In contrast, central banks in Western Europe seem to be much more reluctant to cut policy rates in part because expectations of inflation are less firmly anchored – and this in turn raises the prospect of wages following prices upwards.
The good news for the USA is the turnaround in the trade deficit – helped by a weak US dollar – but this process may turn round, the dollar is set to appreciate later in 2008.
The US will suffer a sharp slowdown and, since the US is 30 per cent of the world economy, we cannot decouple ourselves from the effects. But the BRIC economies have undoubtedly had an impact on bolstering global economic growth. Nearly one fifth of global demand growth over the last seven years has come from China. Indeed in the last six years, China has created another economy the size of France!
Chinese growth will slow down. Rising inflation will prompt further increases in interest rates; their exchange rate will appreciate a little quicker than the period since the fixed exchange rate was abandoned in July 2005. And growth will be constrained by a slower growth of world demand.
There are huge social problems facing the Chinese not least achieving better balanced growth, addressing the relative poverty of people living in rural areas and in coping with the next phase of intensive urbanisation.
Jim O’Neill talked about his research on the Next 11 (N-11) – a development of the BRIC hypothesis using the growth-environment-score approached pioneered by Goldman Sachs. Korea scores tremendously well – indeed it is now on a par with the United States in terms of growth potential and should no longer be classified as a developing country. Nigeria looks best placed among the African nations. India has a stunningly positive demographic profile (certainly better than the Chinese), Mexico and Turkey are populous enough to make a huge difference in the years to come. And Iran could soon rival Italy in terms of the size of her economy. Why on earth is Italy still a part of G7? (!!)
Mr O’Neill handled a range of interesting and perceptive questions. Will Chinese growth implode on the back of irrational exuberance in property and equity markets? Why are so few African countries included in the top echelon of the emerging market countries? Shouldn’t we give much greater weight to the environmental risks that will become evermore apparent in the decades over which the Goldman Sachs projections are based?
This was a presentation and discussion of the highest order, greatly enjoyed by a packed audience in Election Hall.
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