DABERIAM LXI

April 2011

In February we reviewed the various key issues facing the world's economies, but in March we have seen two game changing events. The horror of the Japanese earthquake and the colossally more damaging tsunami that followed resulted in awful death and destruction for tens of thousands of people. It is difficult for us to appreciate the horror and the pain that these events caused and the long lasting scars that will be left on the people of Japan. The economic aftermath is also likely to be more significant than is yet truly appreciated, a theme I will come back to.

The other significant event has been the publication of China's 12th Five-Year Plan. Here again its significance is hardly understood and indeed we have seen very little comment from the Western press or more surprisingly, Western economists - more later.

Other events have largely been more of the same. Mediterranean North Africa continues to be in turmoil and the outcomes remain highly unpredictable. While the intervention in Libya seems to be proving successful, it creates many moral and intellectual dilemmas. How brutal does a regime have to be before we intervene as these hugely complex issues are largely indefinable, it is inevitably leading us in the future on to dangerous ground. The problem for the rest of the world is oil supplies and, here the stability of Saudi Arabia is critical There also should be a secondary worry, and that is the contagious effect of these revolutions on the states on the northern side of the Mediterranean. The unrest would primarily appear to have been caused by unemployment of a generation of well educated young, and steeply rising food prices.

This phenomenon applies equally well to the so-called PIIGS. We saw last year serious rioting in Greece and some in France. This summer could see major trouble in other countries, including Britain. Trades Union movements everywhere will be ramping up pressure as Government expenditure is curtailed. In Britain for several years university graduates have found it difficult to get jobs and a number of government employees will swell the ranks of educated unemployed, who will become more angry as they see very little prospect of finding gainful employment.

European governments in general will find themselves more and more unpopular as they fail to meet the aspirations of the electorate. As a generalisation, the last ten years have seen a period of relatively high employment and low inflation for which politicians, while having little real control, have nevertheless claimed credit. Government profligacy and lax monetary policies are now having to be paid for and government, whether it is a dictatorship or democracy, falls into disrepute as the population finds it is having to meet the bill.

Outside the worrying and difficult social problems that the economic readjustment is causing, the good news is that the private economy is beginning to recover in most sectors. Most areas of the US economy are recovering fast. The exception is the building industry; here residential and commercial property was overbuilt, a consequence of low interest rates and lax monetary policy. The bust in this area will take some considerable time to recover and prices inevitably will continue to fall until the market starts to clear. If you cannot borrow to buy buildings, the price of the asset will continue to decline until you can afford to make a purchase, and in simple economic terms the over supply will inevitably drive down prices. A trip through southern Spain demonstrates this supply and demand phenomenon in stark reality, it is unlikely that the many thousands of apartments standing empty have a chance of being occupied in the foreseeable future.

The West's industrial recovery brings us back to the importance of China's 12th Five-Year Plan. Remembering that China's Five-Year Plans are drawn up by an extraordinary carda of experienced bureaucrats, unlike anything we see in the West, and that by and large they have a history of successful implementation; these plans should be taken much more seriously by Western governments and economists.

This one calls for a GDP growth of 7%, considerably down on the last five years. The creation of over forty-five million jobs in urban areas and prices to be kept generally stable. There is a call for a rise in domestic consumption and for the service sector output to rise to nearly 50% of GDP; expenditure on research and development to reach 2.2% of GDP; non-fossil fuel power to reach 11.4% of energy consumption and energy consumption per unit of GDP to be cut by 16%, along with a 17% cut of CO2 emissions per unit of GDP.

On the social front and deeply significant for the West a 13% average increase per annum of the minimum wage and, for good measure, the construction or renovation of 36 million apartments for low income families. This is a flavour of the Plan which goes into extraordinary detail in many, many areas including such issues as the "complete transformation of its form of economic development".

The West will no longer be able to enjoy cheap Chinese manufactures and will find China competing more and more for food and raw materials as the country moves up the ladder of prosperity to higher living standards. These changes are not in themselves worrying, but Western governments will have to adjust their attitudes and policies as well as their behaviour to a new superpower governed, for the time being at least, by men who have vast experience and management capability way outside the majority of Western politicians.

The impact of the Japanese earthquake catastrophe will also have huge ramifications on the West. In the US in particular the trend of moving manufacturing capacity from Asia will be speeded up. This trend started a few years ago as changes in Chinese export policy, along with problems in global logistics started to impact Corporate America. Large corporations are having to do rapid reassessments of these supply chains following the Japan earthquake. Globalisation has meant specialisation on a grand scale as well as consolidation of many industries into quite small geographical locations. Quite minor components that may cost only a few pence but are vital for instance to the electronics of modern motor cars, are sourced from a few factories whose raw materials in turn were made in the tsunami affected areas. The full ramifications of this are yet to be fully assessed but the lesson is that there is today insufficient diversification in the supply of critical parts for many industries. This will add impetus to the return of manufacturing to the West - a great positive.

The biggest negative, however, coming out of Japan will be the political impetus given to the Green movement in particular, those who promote fear over reason will take full advantage to promote anti-nuclear policies. This will cause continuing and growing environmental damage from fossil fuels, as well as hugely increasing the cost of energy in the West.

Damon de Laszlo
April 2011