Global Trends by Martin Khor

Monday 24 December  2007

Have a Merry Xmas when you can….

It was a turbulent year for the world economy, with the United States’ sub-prime mortgage crisis winding its way across sectors and countries.  Luckily the “real economy” of growth and jobs held up in 2007.  But can it continue to do so in 2008?


There is still enough good cheer this Christmas season, due to the momentum of previous years, when the national and global economies were both doing well.

Well, one should “make hay while the sun shines”, as the old proverb goes.  Next year may not be so good.

For 2007 which is fast passing away saw the building up of conditions that may plague 2008 with deep-seated economic problems, perhaps even crises.

The sub-prime mortgage crisis in the United States brewed throughout this year, bringing greater and deeper problems to more and more sectors and countries as it developed. 

The many years of deregulated finance, when it was assumed the market could do no wrong and that the newest financial instruments could do no harm, came back to haunt not only the financial sector but the real economy.

The year 2007 gave a bad name to financial speculation, as many funds and banks reported mega losses and red-faced American and European central bankers who had previously sworn never to bail out speculators and investors had to pump hundreds of billions of dollars of public funds to save the system.

By and large the “real economy” of growth and jobs has so far been spared.  The US economy even grew rapidly by 4.9% in July-September this year. 

But most analysts expect the American party to come to an end, as house construction (a critical sector) declines and housing prices drop (making it more difficult for house owners to service their mortgage, and inducing reduced consumer spending). 

The US economy is known for its resilience but many economists now expect it to slow significantly and possibly go into recession.  The European countries are not expected to take up the slack, as they face problems of their own.

Asia will then face one of its greatest tests since the 1997-2000 financial crisis.  Can the region de-couple its growth and development from the growth of the US and Europe?

In other words, if the US economy goes into a tailspin, and Europe does not grow faster to compensate, will Malaysia and other Asian developing countries be dealt an economic blow, or can the engines of growth in the region continue on their own power?

One positive thing is that Asian countries have in recent years built up large foreign reserves, so they are unlikely to be caught in another debt trap resulting from currency speculation and gyrating exchange rates, as they did in 1997-99.

Also, China and to a lesser extent India have built up growth machines that are pulling along other countries in the region.  This gives hope that a US recession can be cushioned as China’s phenomenal growth continues to propel demand for the products of Asian developing countries, especially commodities.

However, Asia is still very dependent on the West for its exports and foreign investments.  China itself will be affected by a US recession, although it has its own domestic demand to cushion this.

And movements in the Asian stock markets still take their cue from Wall Street and London, as witness the strong swings of recent months.

On the price front, it has been bad news this year for consumers.  The prices of many food items – especially wheat and wheat-based products -- have been shooting up due to many factors, including drought, lower output, higher production costs due to the oil price hike and higher demand.

One other factor that has loomed large in 2007 is the switch from food production to the growing of corn, sugar, oil palm and other crops for bio-fuels.  This is expected to keep food prices increasing and food output down, a phenomenon that the United Nations Rapporteur on the Right to Food has recently called a “crime against humanity.”

Finally, the financial shocks of 2007 have not yet worked their way to conclusion.  The unwinding of the crisis that began in the “sub-prime” mortgage sector is still taking place.

Moreover, the “unwinding” of the gross imbalances in the current account (of the balance of payments), where the United States has hundreds of billions of dollars in annual deficit, while China has hundreds of billions in surplus, has yet to take place.

The year about to pass saw the weakening of the US dollar, especially in relation to the euro, and more of that may take place next year. 

The unregulated inflows and outflows of funds into countries, currencies and stock exchanges have already caused significant instability, and this may continue and perhaps worsen in the months to come.

The signs are worrying.  So have a Merry Christmas and happy new year celebration, before the new year takes us through its twists and turns.