DABERIAM LII

December 2009

As we head to the end of the year it does not seem that much advance has been made in returning the global economy to “normality” - whatever that is. 

The US economy is stabilising. That is the deteriorating trends have now flattened out but the piling up of debt at National Government and State level still continues. China with its huge resources is pouring money into infrastructure and primary industry - steel, aluminium and concrete etc. Russia seems as determined as ever to destroy its economy by creating uncertainly in the Courts; one of the first needs of economic growth is certainty of the enforceability of contract. Europe is a special case; the great concept of a free market for goods and services seems of late to have been entirely lost in battle between the political elite of the various member states as they manoeuvre to get position at the top of the EU hierarchy. Europe also seems to have totally forgotten the concept that leaders are best selected by democratic process. 

Continuing thoughts on Europe, it seems clearer and clearer that the union is becoming economically, as well as politically, dysfunctional. The so-called PIGS - Portugal, Italy, Greece and Spain - are heading towards economic disaster as their Governments fail to address their 
burgeoning deficits. 

As always, France paddles its own canoe, really very successfully, while Germany takes the strain. The German economy, however, is facing enormous strains. It relies on exports to a greater extent than any other advanced economy and the decline here has been dramatic. German companies have not downsized but have been relying on their economic fat to sustain them. German banks have still not addressed the high level of unrecoverable debt and derivative instruments that they hold on their balance sheets. Add to this the high level of the Euro against the Dollar means in all probability that Europe will be the last region to recover from the present crisis. 

The economic debate about the probability of a Dollar devaluation seems to centre around whether it will be fast, ie a crisis, or slow, the least painful way of dealing with the Government debt build up. What is forgotten is the Chinese have the ability to keep their currency pegged to the Dollar and their seeming determination to do so. This means that the Euro and the Yen, along with a few currencies primarily linked to commodities will be on the other side of the equation. Unlike Europe, Japan’s Government and economy is switching focus to China, and will continue to be one of the primary beneficiaries of Chinese industrialisation. 

Strangely, the beneficiary of the current economic realignments seems likely to me to be America. The American population have moved from a five year borrowing and spending spree into savings mode. This will reduce imports. US industry is rapidly restructuring and will over the next few years gain market share in both domestic and in the export markets. I think US financial markets will also benefit as it becomes clearer that the only place to invest surplus cash is in the US. Dubai has thrown sand in the wheels of the fascination with alternative markets for the time being. 

In finishing, it is worth a quick thought on the UK. As I have said before, the UK Government has effectively ceased to function in the run up to the next election. The lack of coherent policy offered by the political parties is likely to lead to a hung Parliament or at best one party with a minute lead. 

The current Government having lived off the service sector, and the City in particular, has through taxation and legislation slowly strangled UK industry and so far produced no policies for the future. 

The Conservatives have succumbed to lobbying from the City and embedded Greens within their party, seems to have decided that industry is bad, finance and shop-keeping is good, and the lights will be kept on by windmills! Their tax policy of reducing Corporation Tax by a few percent and removing the ability of companies to write-off Capital Expenditure means that the prospect for industrial growth and re-building of our energy and transport infrastructure will go out of the window. The new year brings the prospect of higher prices in the shops and rising unemployment caused by a large increase in insolvencies as companies find it more and more difficult to meet their pay roll and taxes and the Revenue get more desperate to collect everything they can. 

While the above may seem depressing, I feel optimistic. There are likely to be less surprises as the world hunkers down to dealing with the economic surprises that have been the hallmark of the last eighteen months. While things may be dreary and difficult, some semblance of certainty will return.

Damon de Laszlo 
December 2009