Out with the new—in with the oldby Jay Elwes / December 10, 2015 / Leave a comment
Published in January 2016 issue of Prospect Magazine
Prepare for a return of the old economic order. In the coming year, growth in Britain and the United States will be steady, unemployment will decline, interest rates will rise and there may even be a pinch of inflation. And while the “Anglo-Saxon” model delivers this welcome result, the so-called “Bric” economies, a group that includes Brazil, Russia and China, will run into trouble.
The World Bank says that both Britain and the US will grow at 2.8 per cent in 2016. As this happens, it is likely that consumer confidence will pick up and the stock markets will boom, both buoyed by cheap resources and commodities.
Increasingly the benefits of technology will drive economic growth in both Britain and the US, which can take advantage of improvements in battery technology, electric motors and the falling price of renewable energy, especially solar. The smartphone economy will begin to contribute to economic output, with its twin benefits of high growth and low inflation.
The Brics face a very different outlook. In the aftermath of the 2008 crisis these commodity-rich nations boomed, buoyed up by Chinese demand for raw materials. But China is building and exporting less, and encouraging the development of domestic business and consumption. The result is that global demand for commodities and raw materials has collapsed and world trade has slowed sharply. The Brics have run out of customers.
Brazil is stuck in a severe recession, likely to be aggravated by the political and financial scandals engulfing the country. In 2015, its economy contracted by 1.3 per cent. It will not recover that loss in 2016. Russia is also in recession, its economy bled by military commitments in Syria and Ukraine. The oil price remains stubbornly low and in November dipped below $45 per barrel. At that level, Russia’s energy exports will not save it from the economic mire. The International Energy Agency predicts that demand for oil will drop further in the coming year, falling from a 2015 peak of 1.8m barrels per day to a 2016 low of 1.2m. The oil price has further to go.
To cap it all, a recent paper by economists at Citigroup stated that, in 2016, “there is a high and rising likelihood of a Chinese, emerging market and global recession.” Capital spending in China has fallen and employment will shortly follow. The gulf between the official version of economic data and events and the one derived from private sector sources grows ever larger. The Organisation for Economic Co-operation and Development and International Monetary Fund have also warned about the weakening global economy.
This is the looming economic divide: on one side the Anglophone UK and US, which will experience something close to economic normality and on the other, the Brics. Out with the new—in with the old.