This latest round of eurozone “crisis diplomacy” is set against a backdrop of growing evidence that the world economy is slowing. For weeks, global stock markets have been treading water, remaining relatively buoyant but on extremely low volumes, waiting for the QE lifeboat.
It really does seem as if every financial analyst in the world is fixated on the big central banks, anticipating the moment when the US Federal Reserve, the Bank of England and – as Berlin finally capitulates – the European Central Bank fire-up their virtual printing presses.
In the real world of GDP, jobs and deficits, meanwhile, the bad news keeps rolling in. Last week, the Congressional Budget Office, in its latest budget and economic outlook, laid out the dilemma facing America. The “baseline” scenario is that the world’s largest economy will grow by just 1.7pc in 2013, making no dent in its 8pc unemployment rate. This lacklustre outcome will only materialize, though, if US lawmakers avert a wave of tax hikes scheduled for early 2013, when previous temporary reductions are due to expire.
If Congress does nothing, the CBO says, and the economy isn’t diverted from this “fiscal cliff”, America could dip back into recession next year. If the Bush-era tax cuts are extended, though, and the fiscal cliff is avoided, the US deficit will top $1,000bn for the fifth straight year. That would “place the budget on a path which is ultimately unsustainable”, says the CBO. Any day now, the US national debt, will hit a massive $16,000bn – having doubled in five years.
US Treasury yields may be strapped to the floor, for now, courtesy of printed money and not being denominated in euros, but that doesn’t mean America is out of the fiscal woods. And are recent stock-broker reports of growing “bullishness” towards the US housing market really likely to convert into consumer confidence and broader growth when 24pc of US residential mortgages remain “under water”?
It’s not just the Western economies that are suffering. The latest Chinese HSBC manufacturing index fell to a nine-month low last week, with new export orders falling to their lowest level since 2009. A similar story of slower export growth and slippage in industrial production can be found in most other Asian economies.
In Japan, still the world’s third-largest economy, exports slumped in July, being some 8.1pc lower than the same month last year. While the strong yen didn’t help, it was Europe’s on-going woes that really did the damage. Sales of Japanese goods to the Western Europe were no less than 25.1pc lower in July compared to July 2011. This is the kind of export nosedive Japan hasn’t experienced since the immediate aftermath of the Lehman crisis.
One of the very few pieces of good news in terms of the global economy last week was that Russia became the 156th member of the World Trade Organization. During the 21 years since the Soviet Union collapsed, the Russian economy, despite the trauma of the transition from “state-planning”, has emerged as the 9th largest on earth, and the 6th largest as measured by Purchasing Power Parity.
Despite what you read in the papers, the Russian economy isn’t all about commodities. While oil and gas accounted for 40pc of GDP in 2003, last year the figure was 17pc. Russia’s service sector, pretty much non-existent under the state-planning of yester-year, has grown like topsy and is now three-times bigger than its commodity sector.
China’s entry into the WTO in 2001 set the stage for a decade of explosive growth, during which its exports surged five-fold. Russia is less well-placed to enjoy that kind of spurt. One reason is that it is already quite a rich country – with an income per head of around $13,000, not far below that of some Western countries. Even after its “economic miracle”, China’s per capita income is still as low as $5,500, and India’s is only $1,400, which provides a lot more scope for growth.
Another reason that Russia won’t “do a China” is that Beijing’s WTO accession came at the start of a period of strong global expansion, as Western consumers and governments took on debt at an unprecedented rate. Moscow, in contrast, is joining the “global club” at a time when the West is seriously becalmed by the excesses of the past, and at the beginning of an extended period of de-leveraging and, at best, subdued growth.
Some would say that my views on Russia are biased – seeing as the company I work for has a long track-record of investing there, and I’ve spent a fair chunk of my adult life living and working in Moscow. I would say, in retort, that much of the Western media has a view of Russia that has more to do with the intrigues and paranoia of the Soviet-era than the reality of what is actually happening on the ground today.
Look at the growing trade links between Germany and Russia, for instance. Even before Moscow’s WTO entry, Russia has already established itself as the biggest single-country trading partner of Western Europe’s economic powerhouse. More than 6,000 German companies are currently active in Russia. Spend time in the country’s big cities, not just Moscow and St. Petersburg, but in the Russian provinces too, and you are faced with a barrage of advertising by German companies and German-made goods.
Since 2001, European Union exports to Russia have grown from 3.6pc to 7.1pc of all EU goods sold abroad. German machine-tools, cars and other manufactured products have been the main beneficiary of this rise. Germany accounted for a massive €34.3bn of the EU’s Russia-bound exports last year, up no less than 31pc from the year before, and dwarfing the €7.4bn of goods from France and a paltry €4.7bn from the UK.
Germany doesn’t only export to Russia, of course, but also imports commodities, not least natural gas. Some 40pc of Germany’s gas consumption now comes from Russia, including via the new “Nord Stream” pipeline, directly from Russian to Germany, across the floor of the Baltic Sea. While the UK has taken a pretty sniffy attitude towards post-Soviet Russia, the Germans have been more pragmatic and are now reaping the economic rewards.
The World Bank estimates that the Russian economy should enjoy an estimated $162bn annual gain from WTO membership – not bad for an economy where annual GDP is close to $2,000bn. Being in the WTO should enhance competition within the Russian economy, acting as a catalyst for further reforms and diversification. The “stamp” of WTO approval, which could soon be followed by membership of the Organization for Economic Co-operation and Development, should also make mainstream investors less nervous.
Within the salons of Brussels, the eurocrats have become increasingly upset, in recent years, about the amount of diplomatic time and effort Germany has lavished on its relationship with Moscow. I can report, from the business front-line, that German companies – from VW to Siemens – are very heavily involved in Russia, building their market share. They’re more than happy that other “advanced economies”, like the UK, are keeping their distance. The Germans like building companies in Russia because they find things they admire, such as well-trained engineers and a government that doesn’t live beyond its means.
So, let the “crisis diplomacy” of the eurozone continue, to whatever conclusion it may. But keep in mind that Germany – the only truly world-class Western economy these days – is increasingly looking east.