BARELY A few weeks ago the economic outlook, if not exuberant, was at least sanguine: growth, though at a slightly more modest rate.
By the middle of last week, the talk was of another global financial crash. Dramatic falls in world stock markets, triggered by worries over oil and China, threatened to undermine business confidence and investment across a broad front.
Market falls of 20 per cent since last spring have taken Europe, Japan and the UK into a fully-fledged bear market. The value of companies quoted on the FTSE 100 alone has fallen by no less than £396 billion since then – more than £6,000 per person in the UK.
By the end of the week a rally of sorts had set in. But not before the business and economic mood had darkened sharply.
The big questions at the World Economic Forum in Davos last week centred on fears of a surge in oil and energy-related bad debt, powerless central banks and deepening secular stagnation.
And that has led to even deeper questions as to how we can arrest and reverse this slowdown and find the next growth impetus – one that can lift investment, growth and living standards.
No-one doubts that the oil price slump spells further pain for the energy sector, bringing yet more cutbacks and retrenchment for the North Sea industry.
But looking at the bigger picture, how did the low oil price turn into such bad news? Better, surely, to have oil at $30 a barrel (assuming it stays this low, which many doubt) than $126.
Analyst Charles Robertson from Renaissance Capital compared the oil price to global GDP. The year 1979 saw the high, with the world spending 7.5 per cent of global GDP on oil. “More than education and defence spending globally, combined,” he noted.
The low was in 1998, at 1.1 per cent of GDP. That coincided with an emerging-markets crisis. This year, says Robertson, if oil averages $23 a barrel, then spending would amount to 1 per cent of GDP, using IMF estimates. That would mark a 50-year low – bad news for oil exporters certainly, but a boon to oil importers – and the UK is still an oil importer.
And meanwhile energy bills for businesses and households alike have fallen. That should help relieve the financial pressure on households and sustain consumer spending.
What, then, of the impact of slowing growth on debt-soaked advanced economies and the apparent disarray over central bank policy? Many fret over the apparent powerlessness of central banks – that with interest rates down at ultra-low levels there is no ammunition left to fire. But the Bank of England’s Mark Carney has now signalled that a rate rise is now off the cards for this year, and the European Central Bank is pondering more Quantitative Easing: too early yet to predict that central banks have run out of road.
However, deeper worries persist. The corporate world today is having to contend with a technological revolution of a depth and speed that is shaking our faith in existing business models.
Driverless cars, machines that perform surgeries, battery packs to power the home, quantum, computers 100 million times faster than your laptop will greatly improve our lives. But companies are struggling to adjust to changes that could leave them on the scrap heap. And the fear is that new investment today will quickly be obsolete.
The disruptive effects of the digital revolution on business models and company earnings give Joseph Schumpeter’s creative destruction dramatic new life – but what lies immediately ahead is a lot of destruction before we get to the creative bit.
Earlier this month James Anderson, investment director of the £3.3 billion Scottish Mortgage Investment Trust, warned that 69 of the world’s 100 biggest stock market companies “face doom in the next ten years”.
“We live,” he declared, “in a completely different world than we did 12 months ago”, arguing that conventional economic measures such as GDP are failing to capture what is really going on.
Sixty-nine of the world’s 100 biggest stock market companies, he predicts, “face doom in the next ten years” as a result of the revolutions sweeping the energy, healthcare, transport and communications sectors.
Others have advanced a more far reaching critique. Capitalism, writes the Channel Four economist Paul Mason in his new book, has “reached its limits”. At the heart of his argument is that information technology, the internet, and mobile communication “have reduced the need for work”. But is it true that “the coming wave of automation will hugely diminish the amount of work needed”? Does IT really mean fewer jobs?
I remember back in the mid-1980s returning from the US laden with lengthy articles in the New York Times predicting a wave of middle class redundancies and a “crisis of leisure” as the penetration of computers and the “paperless office” (remember that?) destroyed millions of jobs.
But millions of new jobs have been created. And it is ironic that in this week of deeply apprehensive news, we read of employment in Scotland climbing back to pre-financial crisis levels – and hitting a new record.
The core argument that capitalism is “finished” and we can only “rescue ourselves from turmoil and inequality by moving beyond capitalism” – overlooks both the adaptive nature of capitalism – its continuous ability to absorb shocks, to innovate and find new areas for investment – and the many variants of the capitalist model – from laissez-faire (long abandoned) to state and welfare capitalism. And for all its faults, it’s been variants of capitalism that have, since the fall of the Berlin Wall, lifted hundreds of millions out of poverty, particularly in developing countries.
It will absorb and change – just as it has always done. But that should in no way minimise the turbulence that lies ahead – and what this wave of change means for governments, companies and households the world over. «