Brazil, which saw its credit rating downgraded to junk last week, is only the latest Brics economy to crumble in the face of a strong dollar, a global trade slowdown and the prospect of higher US interest rates.
Russia is already in recession; many economists believe China is heading towards a “hard landing”; and South Africa, which managed to append itself to the emerging-markets club in 2010, is on the brink of recession.
Of the group once identified as the shining economic beacons of the future, only India has so far remained relatively insulated from what World Bank chief economist Kaushik Basu described last week as the “troubled” state of the global economy.
It wasn’t supposed to be like this. In 2009, as the rich western countries were surveying the chaos wrought by the financial-market crisis, China was cranking up an immense fiscal stimulus programme to boost demand and kickstart growth. Beijing’s ability to muster financial firepower in the face of the crisis seemed to underline the shift of power towards the nimble emerging nations, with their rapidly growing middle classes, and away from the sclerotic Old World.
“Decoupling” became fashionable. Instead of being tethered to the fortunes of the mighty US (“When America sneezes, the world catches a cold,” went the old saw), emerging economies would break free, nurturing trade links across the developing world and fostering homegrown demand.
But seven years on from the collapse of Lehman Brothers, the chaos wrought across financial markets in emerging countries by the prospect of a rise in US interest rates – which could come as soon as the Federal Reserve’s meeting this week – is a reminder of how closely tied the Brics economies remain to the world’s biggest economy, and vice versa.
The term Brics was coined by former Goldman Sachs economist Jim (now Lord) O’Neill – George Osborne’s freshly ennobled Treasury minister. He never saw their rise as inevitable, but the acronym captured a widespread sense of optimism, and indeed China, India and Brazil in particular have made extraordinary strides in lifting their populations out of poverty.
Yet today, the twin threats of a strong dollar – driven by the prospect of central bankers lifting interest rates in the relatively strong US economy and a sharp slowdown in Chinese growth – have sent emerging-market currencies plunging. The fallout goes well beyond Brazil, which has pegged its fortunes closely to serving Chinese demand, and Russia, which has been hit by the oil price crash. It is being felt in a swath of other countries, from South Africa to Turkey.
Warning lights are flashing right across the world, from slumping trade volumes and volatile stock markets to declining inflation and rock-bottom commodity prices. Copper, iron ore and aluminium have tumbled this year.
And the old impression of bottomless pockets in Beijing, giving policymakers unfettered power to direct the mighty Chinese economy at will, has given way to the sense that its politicians are just as baffled as their western counterparts were by the sub-prime crisis.
Even if the Fed holds its fire this week – which it may well do after a chorus of warnings about the knock-on effects for the global economy – a more turbulent period looks to be in store, and it will be a while before anyone claims that the future belongs to the Brics.
China has long wanted to dislodge America’s crown as the uncontested hegemon of the global economy. If, as Willem Buiter, chief global economist at Citigroup, predicted last week, China is leading the world into recession, it will underscore its weight in the 21st century world economy – but not in quite the way that Beijing might have been hoping.
Thank you, Mr Potts. We’d never have thought of that
David Potts has been in charge of Morrisons for six months, so he has had plenty of time to dream up a strategy to get the struggling Bradford-based retailer back on track. Yet the presentation he gave to the City last week could have been drawn up in a week.
His six priorities for Morrisons were “to be more competitive”, “to serve customers better”, “to find local solutions”, “to develop popular and useful services”, “to simplify and speed up the organisation”, and “to make the core supermarkets strong again”. Any chief executive not trying to do these things shouldn’t be anywhere near the job.
The list of “key financial objectives” for Morrisons laid out by Potts was even worse. Targets are to grow like-for-like sales, rebuild profits, improve return on capital and generate cash. Is there a company that doesn’t want to achieve these goals?
In one sense, it is a commendable that in an era when sport, politics and business are obsessed with strategy, PowerPoint presentations and management babble, Potts is focused on execution and doing the basics right. But hearing him say over and over that his strategy for Morrisons revolves around “listening to customers” felt incredibly underwhelming.
This is a company that has just reported a 47% drop in pretax profits and a 2.8% fall in like-for-like sales. Morrisons is on the sickbed, and while Potts’s plan may stop the illness getting any worse, it does not sound like a cure.
The problem for retailers is that doing their best is not good enough – they must be better than their competitors. However, Aldi and Lidl are cheaper than Morrisons, Tesco has more stores, Sainsbury’s is seen as higher quality, and Asda has the firepower of Walmart, the world’s biggest retailer, behind it.
Potts is regarded as a talented shopkeeper in the grocery industry. In the future, we may applaud the fact he rolled his sleeves up and got on with fixing Morrisons rather than indulging himself with a slick presentation. Alternatively, maybe we will be lamenting his lack of vision.
At $20 a barrel, oil could stir up troubled waters
Not since 2002 have oil prices fallen to $20 a barrel. And they aren’t back there, yet. But experts at Goldman Sachs have cheered motorists and alarmed oil producers with predictions that crude could halve again and hit $20 because of oversupply. Waning global demand has failed to soak up all that oil flowing out of new US shale wells and Iraq. For net oil importers such as the UK, cheaper crude boosts household budgets and spending. For oil producers, including in the North Sea, it costs jobs.
But if the oil price were to halve again, it would undoubtedly set off alarm bells about the health of the global economy. Goldman admits the $20 level is a worst-case scenario. But if the prediction is right, central bankers fretting over when they can finally get interest rates back on the path to normality will have yet another conundrum on their hands.
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