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Last year at the World Economic Forum in Davos, “anti-Americanism was rampant, and the prognosis for the global economy and world financial markets was grim, to say the least”, says Morgan Stanley’s Stephen Roach.
A year on, it’s all changed at the conference. The war is no longer the biggest of headlines, the global economy has reawakened, financial markets are on a tear, and there is “a growing sense of conviction” among the delegates that “this is the start of something big and lasting”.
However, that conviction is wrong, says Roach. “Imbalances matter”, and there are huge imbalances in the world economy. The main one is that it is effectively run by “one engine” – the US. And that engine is constrained by “a record shortfall of net national saving, a record current-account deficit, record household-sector debt loads and sharply elevated debt-service burdens, and near-record budget surpluses”. It is also “lacking the traditional fuel of job creation and income generation that has driven every cyclical recovery in the past”. Given all this, there is no way that “US-centric global growth” is sustainable indefinitely.
Indeed, it is not, says The King Report. And the numbers are already showing us this. The headline GDP figures for the US in the fourth quarter were “ugly” and the details were “even uglier”. The average estimate of fourth-quarter GDP growth was for an annualised rate of 2.8%, but in fact it came in at 1.15%, the slowest pace in three years and more than 40% less than the rate of growth in the third quarter.
Worse, real final sales (GDP minus inventories) actually fell by 0.3% in the last three months of 2005. Negative real final sales have occurred only three times since 1960 “without the US being in recession”. It doesn’t matter what the “permabulls” say, these numbers make it clear that “the US has lost control of its economic and financial destiny”.
Merrill Lynch’s David Rosenberg agrees that things don’t look good. Note, he says, that real wages are still falling (ie, wages are growing more slowly than inflation), something that means people’s pay packets buy them less every week – which can hardly be good news for consumption, nor for the nation as a whole. Indeed, “collapsing wages with escalating inflation in the necessities of life is not a productivity miracle, but the basis for revolution”.
Inflation really does seem to have become something to worry about, says Gary Halbert on InvestorsInsight.com. The GDP price deflator – the government’s indicator of consumer inflation – rose 3.3% in the fourth quarter. That was “well above expectations” and will leave new Federal Reserve chairman Ben Bernanke (who has just taken over from Alan Greenspan) with something of a dilemma when it comes to interest rates. Should he raise them to deal with rising prices, or cut them to try and hold off the economic turndown? If he goes for the latter, he’ll be risking the Fed’s hard-won reputation as an inflation controller, but, says Halbert, if he goes for the former ,“we will see another shakeout in the stock and bond markets”.
Sadly, none of these issues seemed much up for discussion in Davos, says Roach. All the evidence tells us that America is “utterly incapable of providing a sustainable growth dynamic” for much longer. However, up in the snowy retreat that is Davos, most people simply refuse to believe it.
...and Bush’s State of the Union speech shows he's no better
Tuesday night’s State of the Union address was President Bush’s annual opportunity to lay out his plans for the next few years. And he had a go at being bold, grabbing the headlines over America’s “addiction” to oil and pledged that he would cut the US’s reliance on Middle Eastern oil by 75% over the next 20 years, while promising a “22% increase in clean-energy research”.
This sounds good, says Gerard Baker in The Times, but a quick look at the detail showed that it wasn’t really much of a plan after all. Instead, the main proposal of the so-called Advanced Energy Initiative amounts “to a small increase in federal spending on alternative fuels”.
And as for the proposed cut in imports from the Middle East, say Elisabeth Bumiller and Adam Nagourney in The New York Times, it really isn’t that big a commitment. Note that the US currently “gets less than 20% of its oil from the gulf”. Still, even if the proposals weren’t that dramatic, they represented something of a change of heart from George Bush, the “former Texas oilman”, says Michael Kranish in the Boston Globe. In the past, his main priority has appeared not to be cutting our reliance on oil, but creating “tax breaks and benefits for the oil and gas industry”.
Bush also mentioned his concerns for America’s international competitiveness in his speech, claiming that “with open markets and a level playing field, no one can out-produce or out-compete the American worker”, and proposing the American Competitiveness Initiative to target improvements in meeting global challenges.
This was another red herring, says Baker: it sounded good but “amounted to no more than a tweak upwards in funding for the training of teachers”. All in all, the speech was “capably presented, well organised and sometimes lofty in tone”, says Tom Shales in the Washington Post, but its content was “lacklustre, ordinary and, most of all, generic”.
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Annunziata Rees-Mogg
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