Economic outlook

Editorials

2008 – the year of living dangerously

“With the end of summer 2008, storms are battering world stockmarkets like the hurricanes lashing the coasts of America. After the US Treasury rescue of FannyMae and FreddieMac, and especially after the grant of Chapter 11 protection to investment bank Lehman Brothers – founded 160 years ago – all the facts that seemed to slightly ease concerns over the summer are now forgotten, and 2008 is now well and truly the year of living dangerously on the financial and economic front. Admittedly, commodity prices, and in particular oil prices, have started to ease, but, for the moment, they continue to fluctuate around levels never seen prior to 2008. Also admittedly, the US situation has seemed more
favourable,with growth of 1% in the second quarter of the year, but this upturn is explained in very large part by export price competitiveness gains related to the fall in the dollar against all other currencies. Over the whole of 2008, more than three quarters of US growth will come from the contribution of foreign trade, and it will be impossible for the world’s leading economy to repeat this performance next year.

At the same time, the spreads applied on lending to businesses (i.e., the premium over government bond rates that large companies must pay in order to raise finance on the markets) have not stopped increasing, demonstrating the genuine blockage in investment finance, affecting even very large global businesses. And at the beginning of September, the bankruptcies on the part of financial institutions in the US and of major world industrial or services companies have shown, rather, that the worst is yet to come. The euro zone outlook is now a cause of increased concern following its results for the second quarter, during which overall domestic demand in the zone contracted. The European economies have thus moved into tune with the US crisis since spring, and the preliminary figures for the summer period suggest that this situation is not improving. The economic crisis will continue to spread on both sides of the Atlantic over the course of the autumn, first in the construction sector, also via the financial crisis in credit markets,which undoubtedly has yet to claim all its victims, and lastly with the crisis in consumption, durably traumatised by the explosion in prices of some weeks back.

In this context, the economic policy responses planned by various OECD countries offer food for thought: it is during the autumn that most governments complete their budgets for the following year, and wherever they can – that is wherever budgetary lee way resulting from good management in previous years permits – governments have opted for recovery policies. It is noted that the United States, Spain, the United Kingdom, and undoubtedly Germany, are all ready to inject not inconsiderable sums into their economies in order to avoid recession. What do these four countries have in common? They all returned to a balanced budget in the course of the last four years. By contrast, France and Italy find themselves blocked: with their public finances mired in debt that kept rising even during the years of economic growth since 2003, both countries are bound hand and foot in the face of the economic downturn and the upheaval in the financial markets.

Karine Berger

Source: Euler Hermes Economic Outlook, Autumn 2008

A little reminder of the 1970s

‘Oil shock’ – the very phrase seems a little old-fashioned, or at least ‘retro’, so long has it been since we last experienced one. But hearing it again now, thirty years on, the old memories come flooding back – the global redistribution of wealth, the ineffectual monetary policies, the drive to save energy – all brought back to mind by those two words, themselves a sort of Proustian reminder, redolent of oil and the 1970s.

We had forgotten, first of all, that an oil shock is above all a violent redistribution of the world’s wealth, from those who use oil to those who produce it. To give an idea of the scale of this, the rise from $73 a barrel last year to an average of a little over $120 a barrel this year corresponds to the sudden transfer of $620 billion from the major net importing countries to the major oil exporting countries. This calculation, based on 2008 alone, needs to be doubled if we are to gauge the latent shock that has been developing from2003 onwards. Overall, it works out to around 2.4% of world GDP, which, since 2003, has changed hands simply because of the rise in the price of oil. For the record, the oil shocks of 1973 to 1980 represented a transfer of 1.9% of world GDP. Another thing we had forgotten is that the initial shock always gives rise to multiple international macroeconomic shocks.
First, the general equilibrium in current account balances obviously gets called into question. However, the OECD countries are not necessarily the ones that suffer the most damaging effects: wealth transfers also occur between developing countries, and to an even greater extent today than thirty years ago. Among the ten biggest net oil importers, we find China, India and Taiwan. China, the third biggest net importer, is seeing its much-heralded external surplus trimmed by $60 bn, or 1.4% of its GDP. Naturally, the question of the dollar pegging of currencies of some producer countries, for example Abu Dhabi, is equally called into question.
Second, inflation is revived. Even if the shock is not quite on the same scale on opposite sides of the Atlantic, the euro zone being partially shielded by the high level of the euro, the effects are still very similar on consumer prices, up by 4% in the euro zone in June, and by 5% in the US in the same month. Undergoing, thus, a fairly similar shock, the consequences are identical: in the US and the euro zone alike, household consumption is floundering at its lowest rate of growth seen for a decade. This sudden shortfall in domestic demand is what is sending growth to around zero – in the US, in France or in Italy alike – in this second half of 2008.
Third, serious uncertainty surrounds the state of business profitability: the supply shocks of the 1970s gave way to several years during which production was restructured across the world, notably in industry. Still, this second chapter of the 2008 shock has not yet been written. And, in the face of all these more or less confirmed outcomes, there again arises the issue of energy independence: thirty years after the first campaigns to save energy, the landscape of oil dependency is extremely diverse, notably in terms of the choices made to either pursue or forego nuclear energy.
France, which has taken the former route, has assured itself 50% self-sufficiency in energy. Among its neighbours, the figure is only 18% in the case of Italy and less than 40% for Germany. These great differences could well determine a large part of the economic future of each of these economies.

Karine Berger

Source: Euler Hermes Economic Outlook, Summer 2008