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Professor Norbert Walter, Chief Economist, Deutsche Bank

When addressing global economic issues, almost everybody is talking about China. Its zest for growth over the last two decades, its attraction of FDI, its emergence as a sales market, its maturity in dealing with geo-strategic matters all impressed the rest of us. Now, it goes to a new stage. After becoming a part of ever more multilateral agencies such as the WTO, it sets sails to conquer the world by taking over foreign companies even in the heartland of capitalism: The United States. But it is other, more mundane, issues that have made it to the front pages of the news: China has turned dull commodities markets into a hot bed. The same goes for energy, especially oil that now becomes scarce and expensive. Are we in for a third oil crisis?

Asia - more than just China

While everybody is impressed by China, a considerable number of other players in Asia deserve attention. This area is divergent in many respects, even more so than Europe, praising itself often as the place for greatness through variety! The rising star of the Asia region clearly is India. Do not get it wrong: India is still the place for developing country style infrastructure and an administration with little resemblance to being lean or fast. But its language skills, its mathematical education of a large number of gifted people and the offerings of the internet have hooked up the city and the jungle to the outsourcing wishes of the "other world". Connecting to the world’s value added chains and earning good income that trickles down to the local spots in the country is increasingly possible for the people of India. India’s economy will grow at a good rate for the foreseeable future. It could even accelerate to 8 per cent, if the government becomes effective and physical infrastructure is put in place.

But the rich variety of Asia-Pacific does not end here: God must love Australia. Whatever has happened over the last several years, Australia has benefited from it. The country is considered a safe haven when Asia falters. It is a partner that benefits from the growth momentum in Asia, not least as the grand supplier of raw materials to Asia. But even in the service industry the British heritage has made Australia an attractive place to study for many Asian students. In finance, Australia is an outstanding example of a country committed to sound corporate governance.

Richness and diversity of the Asian countries extend also to small places such as Singapore and Hong Kong. With their tradition and modern time development they provide a ready spring-board for many westerners to enter the region. This is particularly prominent in their role as hubs for FDI and as financial and educational centres. Their particular importance in the field of logistics goes far beyond the high quality physical infrastructure of seaports and airports. The IT equipment plays an ever more important role in this context.

How about the locomotive of the world economy - the US?

While Asia impresses with its dynamism, US still is and will be for the next 15 years the most weighty influence on the world’s economy. Being the richest country in the world, its performance for the last 15 years has been mind-boggling. Its growth was well north of three per cent per annum. This reflects the entrepreneurial spirit of America’s citizens, its thirst for world record consumption, and its superior societal and economic order which provides a foundation for enforcing contracts and obtaining higher and higher return on investment. On top of that, the US is lucky to be run by credible institutions such as the Federal Reserve Bank. Moreover, this country continues to thrive on the basis of a relentless stream of qualified and motivated immigrants bringing in talent and high aspirations and the will to connect to the system.

While structurally sound, the cyclical bonanza the US has been enjoying recently may slow down soon, since no new tax cuts or heavy spending programmes are on the agenda. Chairman Greenspan has increased the Fed’s interest rate to a level that is high enough to take steam out of the US engine. This alongside with much higher energy prices will dampen the cyclical momentum, which in turn will impact those countries that are closely knit into the US economy. Most affected will be the high-export, high-tech ports in Asia, i.e. Malaysia, Taiwan, Singapore and Hong Kong.

Where is Europe?

Europe is behind. It lags in the cycle and lags behind in structural terms. Europe has opted for leisure and redistribution and the result is lack of entrepreneurial momentum, high unemployment, fiscal imbalances and widespread frustration.

Europe’s great project - the EU, for so long an important engine for progress, seems now to stall. Integration fatigue is the order of the day. The attempt to consolidate the treaties by drafting a constitution was unsuccessful. Thirteen countries ratified, two said "no" and the rest were unable to make their minds up. This will factually bring the capability of the 25-member union to a standstill in decision-making, since almost every time one out of 25 members may have an interest to veto and the right is mostly there. The immediate result may be difficulties in enlargement. The most obvious victims will be Turkey and the Ukraine. Their recent stabilisation and reform- mindedness was not least based on the anticipation to become members of the EU. This is not just an issue for them. Bordering EU-states would suffer from any turn towards political instability. And western European businesses would lose a good opportunity to enhance business links with these two populous and emerging countries.

As for the cyclical stance of Europe, the picture is more balanced. Some countries - Germany included - have done a considerable quota of the necessary reform work or may complete it in the near future, with interest rates staying quite low. If the oil prices stop rising, 2006 could be a year of some cyclical improvement. Some countries, however, foremost Italy, have priced themselves out of the market and may thus suffer considerable difficulties.

Still anyone crying for Argentina?

Almost without being observed by anybody, Latin America has worked itself out of economic stagnation. Almost everywhere, left-wing governments are in power. But almost everywhere economic policy has remained reasonable. Business-friendly teams have stayed on-course and reoriented towards the international economy - a bias long-missed during the decades of import substitution policies. Many companies in Chile, Argentina and Brazil are taking full advantage of the dynamic markets in North America and Asia. The abundance of natural resources has given Latin American countries a solid underpinning: they are offering to the world everything from precious metals to pulp and paper, cotton, soy, chicken and beef, not to mention the wines. Their governments are often better aware of global trends and policy environment than their giant peers in the US or Japan.

Risks to the outlook

All too obvious are the risks from the oil market. It is not only natural disasters that cause concern. Terrorist attacks may threaten production and distribution. Social unrest in oil producing countries is even a greater risk factor. Another imminent difficulty is political instability as shown in the Russia/Ukraine dispute. Recent trouble in Indonesia and the political situation in the Middle East add to the worries.

While Europe is not in the eye of the political storm, future changes may pose considerable challenges for its economy. Here, however, risks and chances might be better balanced. Japan’s fate after Koizumi’s resounding victory seems to be clearly improving, with help of more reform-minded policies.

There is one risk that I consider very serious: the need to correct the huge and unsustainable deficit in the US current account. For most of 2006 this problem may be on the back burner. Higher US interest rates and the ensuing interest rate differential in favour of the US could support the US dollar. Only late in 2006, when the US current account deficit stays well above 6 per cent of GDP, will analysts surely zero in on its unsustainability. Then the US dollar will definitively weaken, Asian and European currencies will strengthen drastically. Higher US interest rates will likely follow, hitting the US housing market and sales of other durable goods like cars. Higher exchange rates for yen, renminbi and euro will curtail Asian and European export. A downswing if not a recession may be triggered in 2007.

Biography

Professor Norbert Walter is chief economist of Deutsche Bank Group and head of Deutsche Bank Research. Before his current position he was professor and director at the renowned Kiel Institute for World Economics and was a John J. McCloy Distinguished Research Fellow at the American Institute for Contemporary Studies at the Johns Hopkins University in Washington, DC (1986 - 1987). He holds a doctorate in economics from the Johann-Wolfgang-Goethe University, Frankfurt/Main. Professor Walter is a member of the Committee of Wise Men on the Regulation of European Securities Markets ("Lamfalussy group").

For more information please visit: www.norbert-walter.com

 

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