Even a flight of swallows will not make a summer in 2010
11-1-2010 | Economic news
‘With so much pessimism around, things can really only turn out better than expected,’ Chief Economist Wim Boonstra thought about the economy at the end of 2008. ‘Now, at the close of 2009, the global economy is starting to recover, the stock exchanges have recouped a substantial part of their losses and the worst seems to be behind us. But this time I am inclined to take the opposite view from that of a year ago. Because even a flight of swallows will not make a really good summer in 2010.’
Recovery of growth still hesitant
For a start, the recovery of growth is still hesitant. Up to now it has been driven by investments in inventories, public spending and exports. Exports are in turn benefiting from the inventory cycle and public spending abroad, bringing things full circle. In 2010 private consumption will have to take over the lead from public spending. I think it will, but the recovery will not be spectacular.
Repetition of the present crisis
In addition it will become evident, if the global economy really does pick up at the present exchange rates, that the global imbalances in international payments will increase rapidly again. And in that case the present crisis can already be expected to be repeated within a few years, though perhaps in a slightly different guise. That is why it is regrettable that the issue of skewed exchange rates has still not been dealt with. The dollar has to fall in value, particularly against the Asian currencies.
China: shift the emphasis in its development to private consumption
The Chinese Premier, Wen Jiabao, recently once more severely took foreigners to task for urging China to revalue the renminbi. In doing so, he is short-changing his own country. The Chinese economy is growing fast, but here, again, there is too much emphasis on public spending and exports. Exports are stimulated by the undervalued currency, hence the Chinese reluctance to revalue their currency. But China should gradually shift the emphasis in its development to private consumption, for instance by the development of good social security and by stimulating purchasing power. The first can help to curb the excessive savings rate, the second can be aided by a higher renminbi.
Trade ware between China and the rest of the world?
Premier Wen’s stance nourishes fears that he is concerned about the longevity of China’s growth. Will China turn out to be the disappointment of 2010? But if the Chinese continue to refuse to adjust their exchange rate the danger of a trade war between China and the rest of the world is certainly real. A trade war that will produce only losers.
Economic growth for the Netherlands
Yet even without such conflict, it will take long in the Netherlands before the contraction produced by the recession has been reversed. At some point in early 2012 Dutch GDP will have returned to the level of early 2008. But needless to say the loss of prosperity versus the trend will not have been recouped.
In fact, I see no reason why economic growth should trend higher in the long term. Demographic developments tend to indicate a lower growth trajectory instead. Public finances will have to be put in order and that is sure to temper short-term growth. And it is to be hoped that the superabundance of cheap credit will not return. While this did fuel growth in the short term, it was also a major source of problems.
The good news of course is still that the economy is growing again. The worst does seem to be already behind us. All in all, the Netherlands is still an exceptionally wealthy country. Bearing that in mind, I wish you all a healthy, happy and economically prosperous 2010.
Dr. Wim Boonstra, Chief Economist Rabobank Group
Dr. Boonstra has published numerous articles on banking, financial markets, international economics and business cycles.
