Home' Trinidad and Tobago Guardian : January 1st 2015 Contents BG18 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 2015 • WEEK ONE
Afinancial crash in Rus-
sia, falling oil prices, a
strong dollar, a new
gold rush in Silicon
Valley, a resurgent
weakness in Germany
and Japan, tumbling
currencies in emerging markets from Brazil to
Indonesia, an embattled Democrat in the White
House. Is that a forecast of the world in 2015
or a portrait of the late 1990s?
Recent economic history has been so dom-
inated by the credit crunch of 2008-2009
that it is easy to forget what happened in the
decades before. Looking back 15 years or so
is instructive, though, in terms of both what
to do and what to avoid.
Then, as now, the United States was in the
vanguard of a disruptive digital revolution.
The advent of the Internet spawned a burst
of innovation and euphoria about America s
prospects. By 1999 GDP was rising by more
than 4.0 per cent a year, almost twice the
rich-country average, and unemployment had
fallen to 4.0 per cent, a 30-year low. Foreign
investors piled in, boosting both the dollar
and share prices. The S&P 500 index rose to
almost 30 times earnings, and tech stocks
The optimism in America stood in stark
contrast to gloom elsewhere, as it does today.
Japan s economy had slipped into deflation in
1997. Germany was "the sick man of Europe,"
its companies held back by rigid labor markets
and other high costs. Emerging markets, having
soared ahead, were in crisis: Between 1997
and 1999 countries from Brazil to Thailand
saw their currencies crash as foreign capital
fled and dollar-denominated debts proved
Eventually America ran into trouble too.
The tech-stock bubble burst in early 2000,
prompting a broader share-price slump. Busi-
ness investment, particularly in technology,
sank and, as share prices fell, consumers cut
back. By early 2001 America, along with most
of the rich world, had slipped into recession,
albeit a mild one.
Inevitably the parallels are not perfect. The
biggest difference is China, a bit-part player
in 1999 and now the world s second-biggest
economy, contributing disproportionately to
global growth. There are three trends at work,
though, that destabilised the world economy
then and could do the same now.
The first is the gap between America, where
growth is accelerating, and almost everywhere
else, where it is slowing. In the late 1990s
Larry Summers, then the US deputy treasury
secretary, warned that the world economy was
"flying on one engine."
For 2015 The Economist s panel of forecasters
expects 3.0 per cent growth in America, com-
pared with 1.1 per cent in Japan and the euro
area. China s growth rate may fall to around
7.0 per cent.
Americans can comfort themselves that, as
in the late 1990s, the optimism gap is partially
warranted. Jobs are being created in their coun-
try faster than at any time since 1999, cheap
gasoline has buoyed consumer spending and
business investment has picked up.
The news is not all good, however. Cheaper
oil could tip plenty of America s shale producers
into bankruptcy in 2015, while a stronger dollar
and weakness abroad will hurt exporters, as
they did 15 years ago. Britain, the other Anglos-
phere champion, may also be clobbered by
the euro zone s woes.
The second worrisome parallel with the late
1990s is the dismal outlook for the rich world s
two other big economies. Germany s growth
rate has tumbled to around 1 per cent, and
there is a deeper malaise caused by years of
under-investment, a disastrous energy policy
and a government that is too obsessed by its
fiscal targets to spend money and too frightened
of its voters to push through the sort of struc-
tural reforms that Chancellor Gerhard Schroder
implemented in 2003. Meanwhile Japan has
repeated the error it made in 1997, thwarting
its escape from stagnation with a premature
hike in its consumption tax.
The third echo of the 1990s is the danger
in emerging markets. Back then the problem
was fixed exchange rates and hefty foreign
debt. Now the debts are lower, the exchange
rates float and most governments have built
Still, there are growing signs of trouble;
especially in Russia, but other commodity
exporters also look vulnerable, especially in
Africa. Oil accounts for 95 per cent of Nigeria s
exports and 75 per cent of its government rev-
enue. Ghana already has gone to the Interna-
tional Monetary Fund for support.
In other countries the danger lies in the
corporate sector. Many Brazilian firms are
heavily indebted in dollars. A rash of corporate
defaults may prove less spectacular than Asia s
sovereign-debt crises in the 1990s, but they
will make investors nervous and push up the
Add all this up, and 2015 seems likely to be
bumpy. Bears will bet that a surging dollar,
coupled with euro-zone torpor and a few
emerging-market crises, eventually will prompt
a downturn in America.
On the plus side, stock markets do not look
as frothy as they did in the 1990s: The
price/earnings ratio of the S&P 500 is 18, not
far above its historical average. Although many
big tech firms are investing recklessly, most
have decent balance sheets. The global financial
system is less leveraged and hence less vul-
nerable to contagion. In 1998 Russia s default
felled LTCM, a big American hedge fund. Such
side effects are less likely today.
If the world economy does stumble, though,
restoring stability will be harder this time
around because policy-makers have so little
room for maneuver. Back in 1999 the Federal
Reserve s policy rate was around 5.0 per cent,
leaving plenty of scope for cutting when the
economy slowed. Nowadays interest rates
around the rich world are close to zero.
The political scene also is different, and not
in a good way. At the end of the 1990s, most
people in the rich world had enjoyed the fruits
of the boom. Median American wages rose by
7.7 per cent in real terms between 1995 and
2000. Since 2007, by contrast, they have been
flat in America and have fallen in Britain and
much of the euro zone.
Throughout the rich world voters are already
grumpy with their governments, as polling
numbers and their willingness to vote for
protest parties show. If they are squeezed next
year, discontent will turn to anger.
The economics of 2015 may look similar to
those of the late 1990s, but the politics will
probably be rather worse.
@2014 The Economist Newspaper Ltd. Distrib-
uted by the New York Times Syndicate
The world economy:
past and future tense
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