2012: A mixed year

In: Uncategorized

17 Dec 2012

This is my Perspective column from this week’s Fund Strategy magazine.

What was the defining development of the year? Sometimes the answer is obvious but for 2012 it takes more digging.

In some years a turning point is so clear that the two become synonymous. For instance, 1989, the year the Berlin Wall was breached, is sometimes used as a shorthand term for the end of the Cold War.  This is despite the Soviet Union not being officially dissolved till 1991.

For those who work in the financial markets 2008 is inextricably linked to the collapse of Lehman Brothers and the subsequent financial turmoil. But signs of trouble were already apparent earlier in the year and indeed in 2007 too.

However, in many cases the trends are not so clear. It was not immediately obvious that the emergence of debt troubles in Greece in 2009 was a precursor to a broader eurozone crisis. Nor that the collapse of Northern Rock was a prelude to financial turmoil and recession.

Indeed in some cases there is no obvious turning point. China’s rise is perhaps the key economic trend of this age yet it is hard to identify a key moment in the process. In retrospect the Tiananmen Square massacre in 1989 perhaps showed its determination not to be diverted from its development path.

This year’s Perspective columns covered several recurring themes but none stood out from the others. There were many pieces on the Britain’s ongoing economic predicament, several on the ongoing eurozone crisis and a few on American politics. There was also coverage of a potential war in the Middle East (a staple most years), Australia, Japan and a blog post on Sweden.

Most articles did not fit into neat geographical packages. There were many pieces on growth, inequality and the pervasive cultural aversion to prosperity.

Several articles looked at relative shifts in the global economy including a piece on whether the dollar was losing its dominance. This topic includes a strong candidate for what has a strong case for the year’s greatest transition.

This was arguably the year in which advanced economies were no longer the decisive force in the global economy. At least according to the International Monetary Fund’s October estimates it could be the last year they account for over half of global output

It is no longer possible to consider developing economies as an afterthought in the world economy. The cumulative effect of many years of relatively rapid growth is that such countries not only matter in themselves but their fortunes have a considerable global impact.

The obverse of this, pointed out in a report by Smithers & Co, is that the western powers have less sway over the global economy: “The Post-war era is over. The world can no longer rely on the fiscal and monetary policy in the US, with help from Japan and the UK, to avoid or at least mitigate recessions. (“The End of the Post-war Era” Report No.404. 9 July 2012).

Another consequence of this convergence is that incomes too are becoming closer. According to the recent Global Wage Report 2012 from the International Labour Office wages in developed countries rose on average by only 5 per cent in total between 2000 and 2011. In contrast average wages in Asia almost doubled.

Such statistics have to be handled with care. They are only rough estimates and enormous differences remain between the developed and developing worlds. Nevertheless they show that, by this dimension at least, international inequality is narrowing.

They also raise an important question about the trajectory of the Chinese economy. China looks set to move away from its position as a low wage economy. It is likely to come to depend on more advanced production methods and manufacture more sophisticated goods. This will be an important trend to monitor in the years ahead.

However, there are other contenders for trend of the year. From a market perspective the creation of a potential bond bubble is perhaps most worrying. A report by Bank of America Merrill Lynch in June estimated that the yield on 10 year US Treasuries on 1 June was at a 220-year low. In other words prices were at the highest level for over two centuries. A similar trend was apparent in other developed markets.

Government operations to buy up bonds, such as quantitative easing, seem to be pushing up prices. In the short-term such actions are cushioning the effects of austerity. In the longer-term they could create the conditions for more instability by inflating a bubble.

They also indicate that governments are continuing to prevaricate about tackling economic problems. Rather than find ways to bolster productivity they prefer to postpone difficult challenges by pumping more money into the markets.

In retrospect this year is unlikely to be seen as encapsulating one big trend. Perhaps the eurozone crisis was the most high profile problem but that started before 2012 and will continue after it. The most positive trend of the year is that developing countries are, on the whole, becoming richer. The most negative is that the developed world continues to prevaricate about its economic challenges.

A Merry Christmas and Happy New Year to all readers.