As I went for my morning espresso macchiato this week I glanced at a newspaper stand and saw the British headline “Recession is officially over”.

A think tank here in London used the calculation of manufacturing output rising for two months in a row to support their premise. Everyone, including this writer, wants to call an end to the nasty times, after all this month marks one year since Lehman Brothers was allowed to go bust, which was the last nudge for the global banking system over the cliff.

The Dow Jones Industrials index is reaching out for the 10,000 mark and the FTSE 100 has recently passed the 5000 threshold, both technical and psychological barriers for investors. But no one really wants to address the ten thousand pound elephant sitting on the table: the recovery in the West will be tepid at best.

This past week on our programme we illustrated that point by suggesting we should all mind the gap — recalling the famous electronic audio call one hears in the London Underground marking the space between the train and the platform. But in this case, I am suggesting we should mind the gap of some of the global economic projections for next year.

For example, the International Monetary Fund has upped its projection to three percent, from an earlier, more cautious call of two and a half percent. The United Nations division on trade and development UNCTAD is suggesting something much less – just above one and a half percent.

Hold on a second; one is about the half level of the other which reflects the uncertainty that still hovers over next year. In the region, the outlook is brighter with the most populous country, Egypt, projected to grow about four percent and the UAE around three percent. This is where conservative banking rules and deeper pockets for the Gulf oil producers pay off.

G20 finance ministers met in London to try and work out the more delicate issues before their leaders meet in Pittsburgh September 24. Devising formulas to cap and stretch out bonuses are still on the cards as is a drive to create global regulations for derivative products that got us into this mess.

Sticking with our theme this week, there remains a gap that bankers are currently filling on their own. Current national rules governing those products don’t keep pace with those who are creating them. During the go-go days of the past decade that was okay when money was flowing in, but similar to life after 9/11 and the security that was introduced, rules to govern financial security need to evolve.

The G20, with Saudi Arabia and Turkey as members representing the region, want to finalize the rule-making by the end of next year and aim for implementation by 2012. In sum, lawmakers want to make sure the recovery is well in place and that there is no rush to legislate, with the approach being “let’s get it done right or not get it done at all”.

That is the positive way to view that approach. Dominique Strauss-Kahn the Managing Director of the IMF took a different view. Empowered to re-design the institution and play a leading role in the new global architecture, he said the consensus forming was impressive, but that the world is still awaiting stronger measures and definitive leadership.

The consensus seems to be moving towards boosting capital requirements to match the risks taken on by banks. This formula would provide - as U.S. Treasury Secretary Timothy Geithner suggested - shock absorbers to buffer future downturns. What seems to be missing in this equation is the ability to rein in banks during the boom times when they are taking on all the risks. Who will play the “bad cop” if you will? No one seems to have the answer to that just yet.

But that concern goes back to the failure of Lehman Brothers. In an era of globalization and consolidation, there are ever more powerful universal banks that combine commercial and investment banking activities under one umbrella. If they are indeed deemed to big to fail, will they curtail taking all that risk if big brother – the government – is willing to step in?

Probably not, but not putting safeguards in place to prevent that would mean we would be asked yet again to mind the gap in expectation of future financial shocks.

Labels: banking system, economy, recession

While we are in the midst of a global power realignment between the G8 and the G20, I found it useful to get a temperature reading in what would be a G8 country on its own, my original home state of California.

The landscape continues to attract scores of literary writers who are drawn by the size, diversity and the light. These are the same elements that provide the business vibrancy and creative energy. But there is a critical debate underway on whether the so called Golden State has passed its golden hour and what that may mean for the U.S. economic recovery.

Anecdotally, California remains a magnet for Middle East and European visitors. My British Airways flights to and from Los Angeles were filled with visitors from the region. It is fair to say that our Gulf visitors may have set a record for both the quality and number of bags checked in. So the allure remains, but the shine certainly has been dulled for natives who can put various pieces of the puzzle together.

For one, this downturn has created new terminology in the U.S: “staycation” - a very local vacation. My queries for a Santa Barbara beach house were met with a 20 percent inflation hike due to the local competition by Americans who could not afford or at least justify plane travel overseas.

But far more serious indicators are easily found beyond the shores and nearby wine estates of California. For example, the research belt that surrounds the University of California at Santa Barbara resembles a silver mining ghost town at the turn of the 19th century. Building after building has “for lease” signs posted on former offices of technology and defense companies. California is home to a quarter of the country’s agriculture products, but the latest crop of signs is an eerie indicator for the future.

Mohamed El-Erian, the respected Chief Executive of Pimco - the giant bond fund manager based in Newport Beach, California - recently signalled out “high and rising unemployment” as the main policy issue in the industrialized world. As the economic growth gap widens between emerging and developed countries, pressure will increase on G8 policymakers to protect jobs and wages. The International Monetary Fund placed that growth gap at four percent by mid-2010; it was a record six percent at the start of this year.

While the Middle East is struggling after the contagion of the Western led banking collapse, leading projections still peg economic growth in the region at around three percent for 2010. The excitement this week that the U.S., Germany and France may have bottomed out, greatly exaggerate the breadth of the recovery. It is abundantly clear that central bankers threw as much liquidity as possible at the problem, but there is little left in the arsenal to combat the general sluggishness and unemployment that persists.

A Los Angeles based friend has spent two decades as a banker for a handful of firms. He has been without a job for more than a year and candidly admits that he is not confident that a job exists in the same sector. All options are on the table he says, even moving away from a state that he loves. After being out of work for more than a year, he is no longer counted in the official national unemployment figures now at a 9.5 percent, a 26 year high. Others I spoke with told me not to overlook the “underemployed”, those who are working again but took pay cuts of 25-50 percent in which to do so. It is certainly difficult to fund education fees and buy homes if ones purchasing power has dropped so dramatically.

I was based on the West Coast as a correspondent during the last severe U.S. recession in 1991-92. California felt it especially hard because of the collapse in defense spending after the fall of communism. Real estate prices plummeted, the fall in spending on research and development hit Silicon Valley and Hollywood was trying to adapt to the digital revolution beginning to take hold.

The downturn forced changed and Californians adapted by retooling those sectors. The economy emerged stronger than before and continued to attract new businesses and foreign visitors to its shores. Both are hoping for the same response, but for some reason after this visit my gut says the script may be written differently during this tepid recovery.

Labels: banking system, California, recession

More than 30 years of conflict and rolling political crises do force a measure of discipline if you are to succeed in business under the worst of conditions.

It is in that context that we witness the strength of Lebanon’s banking system today -- the economy at home and even the country’s economy abroad. The last bit sounds a bit unusual, but rings true.

In a country of just over three million people, Lebanon remains both plugged into and dependent on its Diaspora. One third of its total economy is made up of the repatriation of earnings from the 350,000 Lebanese citizens working throughout the Gulf. The good news has been they were pumping record amounts back into their homeland; the bad news is the impact the regional slowdown will have on Lebanon next year.

The Lebanese economy in the Gulf, both the workforce and investment by the large construction companies and hoteliers, according to Finance Minister Mohamad Chatah, is larger than the domestic economy which is just shy of $30 billion.

Lebanon will likely finish 2008 on a high note, with growth above six percent. “There are indications the rate is even higher,” said Chatah the former International Monetary Fund Official in an interview from Beirut, “We used five percent for our budget projections for 2009 and we are likely to reduce that to three to three and a half percent.”

Chatah is not alarmist; in fact he is a common sense realist noting that Lebanon will fare much better than most. This is due in part from advance planning by the country’s central bank which kept banks out of investments that were riskier than many presumed.

To play off the phrase from former Citigroup CEO Chuck Prince, Lebanese banks were never on the dance floor when it came to some of the riskier products that were being traded. This Chatah says “paid dividends during the recent global turmoil.”

The finance minister does agree that Lebanese construction companies may be forced to retrench from some of the major Gulf projects on the drawing board due to the uncertainty, and he like many of his fellow economists, was reluctant to call a bottom to the economic turmoil.

“It is the $64 trillion question. Overall the response makes sense to us as economists and hopefully to the business sector, to taxpayers and to consumers.”

Lebanese construction groups, like those from Turkey and other parts of the region have been enjoying the go-go days of $100 oil. As we begin to put the wraps on 2008, many are looking to measure worst case scenarios for next year. What will push ahead or be put aside in countries from Saudi Arabia to the UAE and Qatar?

A much bigger question is what happens throughout the broader Middle East. A very different and positive trend in this economic boom has been the ability and the desire by major Gulf investors to look closer to home. Egypt, Algeria, Morocco, Lebanon and the Palestinian territories have been magnets for petrodollars.

DP World, the ports operator of Dubai World, has been at the forefront of this effort. Leveraging the Emirate’s history as a trading hub, Chairman Sultan bin Sulayam has forged deals from China to Peru. The group has pledged to invest over $700 million in Senegal, the same amount in the Sokhna Port south of the Suez Canal and at the start of November took over two port operations in Algeria.

If you have one of those classic maps of the world on the office wall, you would need 30 pins to cover DP World operations. Ten years ago, we certainly would not be having the same conversation.

That is both the blessing and the curse of this downturn. No-one is interested in picking up sticks and leaving a high growth opportunity. This phase, which many have labeled an Arab Renaissance, is built on reducing the dependency on oil revenues, diversifying their economies, restructuring education systems to match the 21st Century and building regulatory institutions alongside the gleaming, mirrored skyscrapers you find in every city.

To date, we have witnessed an intense competition amongst the major players of the region. The race to be first and the biggest will likely have to change.

Think of the classic fable "The Tortoise and the Hare," where the hare confident of winning the prize napped halfway through the race. This is no time for napping or sprinting.

Labels: banking system, Fiance Minister Mohamad Chatah, Lebanon