Pillars of Strength, Pillars of Weakness
This weekend my family and I will travel to Rome for a visit linked to a mid-term school break. My wife’s family lives around the corner from the Pantheon. The Temple of the Gods dates back to 125 A.D. It is arguably one of the most impressive structures in the world.
When one walks into the Temple, the characteristics of grandeur and strength stand out. The pillars supporting the Pantheon are rock-solid, conveying stability, history, permanence. One gets the opposite feeling about today’s U.S. economy.
It is hard not to turn on the television, open a financial website or a leading newspaper without finding a banner or headline discussing the prolonged recession which may be awaiting America. While it may dominate the news, there is a tendency to use broad strokes to describe what is underway and what impact it will have outside the U.S.
Let’s tackle the first issue. Not every sector is experiencing a drop in demand. While sixteen pillars support the façade and portico of the Pantheon, two key pillars are showing signs of serious erosion in the U.S.: the housing sector and the banking sector. The White House signed into law a $170 billion stimulus package, which is designed to send a signal to both Wall Street and Main Street that Washington is responding to the challenge. As President George W. Bush declared, the U.S. can “absorb such shocks and emerge even stronger.” That is true and I witnessed that first hand in California during the 1990-91 recession. This is a case where having only 200 plus years of history versus 2000 years are a benefit. The economy takes a hit, sectors regroup and businesses move forward.
Right now we are in the evaluation phase. There is still talk within financial circles that the developing world can de-couple from the U.S. and grow strongly despite the turbulence elsewhere. The head of the International Monetary Fund, Dominique Strauss-Kahn poured cold water on that concept this week while in India, calling the theory a “very misleading idea.”
Hold on a second. The IMF cut its forecast for global growth from 4.4 percent this year to 4.1 percent. That is sizable but not catastrophic. Last year’s pace of 4.9 percent was not sustainable. Export-dependent China will slow to 9.6 percent, hardly a panic. Even in London, the Bank of England is balancing interest rate cuts against the threat of higher inflation. Investors are moaning about house price inflation rising only four percent this year; that is not a fall of 10 to 20 percent that we are witnessing in some American cities.
This is where the Middle East comes in. Enemy number one right now is inflation. You see it in wages, housing, clothing and food. It will likely lead to a de-coupling of the five remaining Gulf currencies from the dollar. But during my constant visits to the region, no one is talking about recession. Look at the price of oil. If there was a real global recession, I would expect a $20 drop in crude, not the $2 we have seen over the past month. We can comfortably expect the region to produce growth of six percent in 2008. Not bad and one would say “de-coupled” from the U.S.
What I think we are witnessing right now is not a crisis of growth but a crisis in leadership. During the recent World Economic Forum, I chaired the 2008 Economic Brainstorming Session, featuring a handful of leading economists, a handful of leading CEOs and a handful of finance ministers from the developing world.
In an electronic poll which followed a good 90 minute debate, two items led the survey of the greatest concerns. Over 18 percent signalled a lack of coordinated response and leadership to the current economic crisis as the biggest threat today. Another 18 percent pointed to mismanagement of the crisis, i.e. incorrect decision making. That is pretty alarming. In a globalized world where we are more dependent than ever on each other, those on the frontline don’t believe government and central bankers will deliver the right medicine.
In fairness, the world is more complex than ever. It means central bankers and leaders in the Middle East have to respond quickly to the challenges in front of them and not through the rear view mirror. The dependence on the dollar and skyrocketing real estate prices are good places to start. Initiatives have been put forward and acted upon. More are probably around the corner.
But as the Romans convey through their ever-lasting structures, let’s not overreact to the headlines. While two pillars of weakness are cause for concern, they are not yet a cause for alarm.
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ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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