Do you remember when they said the world has decoupled. The US can sneeze, they said; even find itself confined to bed with a hot-water bottle and a thermometer in its mouth, while the likes of China and the Eurozone could look on sympathetically, say something like bless you whenever Uncle Sam sneezed, and maybe even send a get well card, but, apart from that, just carry on normally.
Well, now we know it is not like that in the Eurozone. We know it isn’t like that in many places – with the whole global economy flirting with recession – but at least China was able to carry on regardless.
Well, now it seems even that idea has been proven false. It has important ramifications.
According to the World Bank, China is set to expand by 7.5 per cent next year, the slowest rate of expansion since 1990.
Now, between you, me and the gatepost, 7.5 per cent may seem pretty good, but don’t forget China still has vast untapped potential, not to mention massive poverty – a report last year said there are still 300 million Chinese people living on less than a dollar a day.
Also, bear in mind that these economic forecasts have developed this unfortunate trend of proving to be too optimistic. So, don’t be surprised if the forecast gets downgraded again.
The trouble is, in many parts of the world the economic crisis is still seen as largely an Anglo-Saxon problem.
It isn’t. The fundamental problem is that, on a global basis, there has been too much capacity and not enough demand for years.
Keynes didn’t say we should play with demand all the time to try and even out the economic cycle. Neither did he say an economy that had followed his policies for 6o years should adopt them even more enthusiastically when times get tough.
But he did say there can be occasions when economic crisis occurs because demand lags behind supply. You can understand why that was so in the 1930s – after all, the previous thirty or forty years had seen remarkable technological innovation that hadn’t been fully absorbed into the economy.
It is like that again. This time, it is the twin delights of globalization and technology that have created vast global capacity.
But the likes of the US, Spain, Oz, Denmark and Ireland, which have seen consumption boost growth, are satiated. Now it is time for the world’s savers to take the baton and boost global demand. If they don’t, we will all be worse off, and that very much includes the world’s savers.
© Investment & Business News 2013