2012 could be a crisis year for the global economy – economist

23 February 2012 12:47  [Source: ICIS news]

LONDON (ICIS)--This year will be difficult for the global economy with attention focused on the eurozone and on European banks, an economist said on Thursday.

“My primary concern is the stressors of Europe, not the Greek crisis or currency rates or even government debt, but the fate of European banks,” Brad Bourland, chief economist of Saudi Arabia’s Jadwa Investment, said at the 16th ICIS World Base Oils and Lubricants Conference.

“The US crisis started as a bank crisis with Lehman Brothers. A potential eurozone banking crisis could be a $14,000bn problem. This would be worse than what happened in the US and it would have far-reaching global effects,” he said

“Will we have a crisis? That I don’t know for sure, but there are certainly challenges that remain and could lead to global problems.”

Global GDP growth fell from 5% in 2007 to 2.8% in 2008 and the global economy contracted by 0.7% in 2009, the first contraction is several years, according to the International Monetary Fund (IMF).

The Fund forecasts global GDP growth at a more average 3.3% in 2012.

However, the US economy is expanding at only a very slow rate of 2% while eurozone GDP this year is expected to contact by 0.5%. China’s economy is expanding at closer to 8%.

Growth has strengthened in the US but serious budgetary challenges remain. Unemployment data have improved from the severe drop in 2008. US housing prices peaked in 2006, dropped sharply in 2008, bottomed in 2010 and are now bouncing along sideways.

Housing data now show some clearing of inventory and improvement but housing prices in the US are not going up; although neither are they sinking.

“The US government is running budget deficits of around 10% of GDP, which is unsustainable to hold at those levels,” Bourland said. “Very large budget deficits will be a drag on economic growth for some time as they are restored.”

Emerging Asia will remain the main source of global growth, though it will be affected by the eurozone, Bourland said.

“China is a very much an export dependent country and right now Chinese exports are flat, and fell to negative levels in the global crisis of 2009. China recovered after that but overall exports are trending downward.”

The grand global problem is too much debt, Bourland said. “The main thing is to look at the overall trend. This is the sum of the debt of households, companies, the governments as a percentage of GDP.”

“The UK is one of the most indebted countries in the world and in this case you have not seen it [debt] turn the corner and come down. Italy, German, France and the US started at levels of debt of up to 50% of GDP and have started to turn the corner.

“Globally the story is that corporations have done a good job reducing debt and corporate balance sheets are quite strong. Governments, households and financial institutions still have high levels of debt. To get to high levels of growth, we have to get the high levels of debt down.”

The main causes of global inflation for the past few years have been food prices or rent, Bourland said. Now, globally, food prices are stable or in decline.

“I see inflation going forward in things you own, not things you consume. There will not be much inflation in consumer prices because the bulk of nearly everything produced in the world is labour costs. There is still a trend to send manufacturing to the lowest cost labour environment.”

Global oil demand is moving east, but supply is moving west.

Oil demand in North America peaked in 2006, plummeted in 2008 and has only recently come back up.

“Oil prices have a real impact on consumption particularly in the US where gasoline prices are sensitive to oil prices,” Bourland said.

After a decade long decline in output from the US, growth in global oil production grew the most in North America from 2009-2011 and that trend is likely to continue. Middle East oil production will also increase significantly, he added.

The conference ends on Friday.

Read Paul Hodges' Chemicals and the Economy blog

Author: Heather Doyle

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