world gdp: west under 50% / shift of german eco policy (3 texts)

http://www.telegraph.co.uk/finance/economics/5424031/Western-economies-poised-to-account-for-less-than-50pc-of--world-GDP.html

Western economies poised to account for less than 50pc of world GDP

Western world economies will account for less than 50pc of global gross domestic product (GDP) this year, six years earlier than expected, a think-tank has warned.

By Angela Monaghan

Published: 12:01AM BST
02 Jun 2009

The Centre for Economics and Business Research (CEBR) is forecasting that because of the downturn and China's economic resilience, the combined contribution from the US, Canada and Europe to world GDP will be 49.4pc in 2009, down from 52pc in 2008.

CEBR said prior to the financial crisis Western world GDP was not expected to fall below 50pc until 2015. The West's contribution to global GDP has been steadily falling since 2004, when it was about 60pc, but the recession has accelerated that process, CEBR said.

"The recession has brought forward the time when the non-Western economies produce more than half of world GDP, for the first time since the middle of the 19th century. We had expected this to happen, but not quite so soon. The West will have to start to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way," said Douglas McWilliams, CEBR's chief executive.

The think-tank predicts the West will account for just 45pc of the world economy by 2012, and expects global GDP to fall by 1.4pc this year, the first decline since 1946. The global economy will start to grow again in the second half of 2009 but will moderate in 2010 as governments embark on "fiscal retrenchment," according to the CEBR.

China will overtake Japan in 2009 to become the world's second largest economy in dollar terms, it said.

"One of the factors causing the shift in shares of world GDP is the fact that the Chinese economy has bounced back rapidly," said Jörg Radeke, economist at CEBR. "This will have knock on effects on oil and commodity prices and is one reason why we are forecasting a price of oil of $80 a barrel in 2012," he added.

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http://www.ft.com/cms/s/0/846fd756-4f90-11de-a692-00144feabdc0.html

Merkel attacks central banks

By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt

Published: June 2 2009 17:25

Angela Merkel, the German chancellor, criticised the world's main central banks in surprisingly strong terms on Tuesday, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis.

The attack on the US Federal Reserve, the Bank of England and the European Central Bank is remarkable coming from a leader who had so far scrupulously adhered to her country's tradition on never commenting on monetary policy.

"What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe," she told a conference in Berlin.

"Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds," she said. "We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time."

Ms Merkel's decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting monetary policy out of respect from central bank independence – suggests Berlin is far more concerned about the route taken by the ECB than had hitherto transpired.

Berlin is concerned that the central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and about the long-term inflationary potential of hyper-lose monetary policies.

The ECB's efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month (May), it followed the US Federal Reserve and Bank of England in announcing an asset purchase programme to help a return to more normal market conditions.

The ECB announced it had agreed in principle to buy €60bn in "covered bonds", which are issued by banks and backed by public sector loans or mortgages.

The covered bond purchases, however, were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May's meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed.

Axel Weber, ECB council member and president of Germany's Bundesbank, has been among those who expressed scepticism about direct intervention in financial markets. In a Financial Times interview in April he expressed "a clear preference for continuing to focus our attention on the bank financing channel".

Mr Weber has also been among the most proactive council members in warning that the monetary stimulus injected into the economy will have to be reduced or even reverse quickly once the economic situation improves.

Details of the covered bond purchase scheme will be unveiled by the ECB after its meeting on Thursday. One likely solution is that the package will be split according to eurozone countries' capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme. Meanwhile, the ECB is widely expected to leave its main interest rate unchanged at 1 per cent, its lowest ever.

Copyright The Financial Times Limited 2009
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http://www.ft.com/cms/s/0/2da17b26-4f9c-11de-a692-00144feabdc0.html

Berlin breaks the unwritten rule

By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt

Published: June 2 2009 19:15 | Last updated: June 2 2009 19:15

It is not the first time that Angela Merkel, the German chancellor, has complained about the ultra-loose monetary policy being conducted in the Anglo-Saxon world. But when she attacked the European Central Bank on Tuesday, for its planned purchase of cover bonds – an unconventional way to help financial markets recover – Ms Merkel broke an unwritten ban on German leaders commenting on monetary policy close to home. The message, it seems, is that Berlin is more worried than people had assumed.

The chancellor is not just concerned about the long-term inflationary potential of excessive monetary loosening. Her main concern is that the expansionary fiscal and monetary policy being deployed across the industrial world to fight the economic crisis could be planting the seeds of future crises.

"We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years' time," she said after criticising European, British and US central bankers.

Like Peer Steinbrück, her finance minister, Ms Merkel has urged fellow Europeans to start working on their "exit strategies". Governments, she says, should commit now to reducing their budget deficits while central bankers should think about how to re-absorb the liquidity they're pouring into markets.

"Our most complex task," she told a conference on Tuesday, "will come once we have overcome the crisis. The question will be … can we return to a path of virtue, as far as public debts are concerned for instance."

The concerns are not new, but her strong and clear comments suggest Berlin is afraid that it may be losing the argument in the global debate about how to overcome the crisis. The evidence, in Berlin's eyes is the ECB plan, announced last month, to purchase €60bn of covered bonds.

Covered bonds, largely backed by mortgages, have suffered in the past two years because of the collapse in many European housing markets and worries about securitised products.

Perversely, her comments could have the effect of helping the ECB by offering a counter argument to the criticism heard from many economists that it has not been sufficiently responsive to the unfolding economic crisis. Since the failure of Lehman Brothers investment bank last year, the ECB taken exceptional steps to pump liquidity into the banking system – but has been more cautious than the US Federal Reserve Bank and Bank of England about asset purchase programmes.

Still, the German chancellor's attack might appear incongruous at a time when inflation pressures are easing markedly – as a result of the weakness in economic activity as well as lower energy costs compared with a year ago.

Eurozone annual inflation fell to zero in May, the lowest since at least 1991, according to official figures last week. In Germany, inflation has turned negative, with consumer prices 0.1 per cent lower in May than a year before.

The worry of German policymakers is that the inflation outlook could change quickly once a sustainable economic recovery gets under way. As such, Ms Merkel's comments could have reflected warnings she has heard from Germany's famously hawkish Bundesbank.

Axel Weber, the German central bank's president, warned in a speech in London last month that "monetary policy has created an enormous expansionary stimulus – not just in the euro area but also worldwide". The impulse it was providing would have "to be reduced or even inverted very quickly as soon as the overall situation improves", he argued.

Changes in monetary policy would take some time to take effect and there was a risk of the economy recovering more quickly than expected, Mr Weber said. "Both factors could lead to inflationary risks making a rapid and powerful comeback, and we should all be aware of this," he said – a remark that the German chancellor might have had in mind when she made her remarks on Tuesday.

Copyright The Financial Times Limited 2009

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imf: bric account for 50% of world's growth

Independent.co.uk

How China is eating the world

China’s remarkable economic growth is powering the
global economy, but can the world afford to keep on
supplying its ever-growing demands for food and raw
materials?

By Sean O’Grady

09 November 2007

Economists are notorious for being unable to reach an easy consensus on many issues, but talk to any of them about the outlook for the global economy and before long the word « China » always starts to dominate the conversation. And it is true that the robustness of Chinese economic growth – around 10 per cent forecast for 2008, barely changed on recent trends – is picking up the pace being lost by faltering Western economies. Trouble is, they’re also eating the world – literally, in the case of food supplies.
According to the IMF, about half of the world’s economic growth this year will be accounted for by Brazil, Russia, India and China – the BRICs. India, staggeringly, is contributing more growth to the world economy than the United States, but China is by far the most powerful engine of growth – more so than the US, the eurozone and Japan combined. So, « China saves the world » – or at least helps to maintain global economic growth around the 5 per cent mark. Were it not for China and these other emerging economies, the world might well be staring a recession in the face.
Yet this phenomenon is not an unalloyed economic good. As yesterday’s news about Rio Tinto and BHP demonstrates, the commodities price boom has led to huge valuations for companies in this field; great for their shareholders, but another signal that the insatiable Chinese demand for oil, copper, zinc, nickel and all the other raw materials of industrialisation is pushing the prices of those commodities to ever-higher peaks. The International Energy Agency warned yesterday that Chinese and Indian crude oil imports will almost quadruple by 2030, creating a supply « crunch » as soon as 2015. Research from ING suggests that marginal Chinese demand for oil, as a percentage of the growth in total consumption, rose to around 72 per cent in 2006, from 10 per cent in the 1980s. This marginal demand could grow to close to 100 per cent of total consumption growth in 2007.
Such an appetite brings with it its own dangers, both to China and the rest of the world. As China pushes the price of oil higher, for example, we in the UK are threatened with « slowflation » – where a slowing economy coexists with higher prices of fuel – and food. Were the British economy to slow to a stop –just possible in say a year – we would see the return of stagnant output plus inflation – the « stagflation » last experienced in the UK in the early 1980s. This is all developing because commodity inflation is spreading into a second phase covering the so-called « soft commodities », as China’s burgeoning middle classes develop a taste for a more Western style of eating, enjoying foods such as milk, pork and beef that were once scarce. Like other peoples suddenly able to expunge the memories of socialist starvation, the Chinese are overcompensating for their malnourished past. Thus they have become a net food importer, probably for the first time in their very long history (socialist-inspired famines apart). There’s also an aspect of culture; as China embraces the West so its young people are more given to hanging around the branches of Starbucks, McDonald’s and KFC that have popped up all over the prosperous east of the nation. The rice bowl is giving way to the burger and shake. The world is seeing some dairy prices up 200 per cent, the cost of wheat doubling and pork up 50 per cent.
In the past decade alone, meat consumption in China has been rising at an average of 2kg per capita per year, a pattern mirrored elsewhere. Over the past few decades, consumption of meat in developing countries has grown at a rate of 5 to 6 per cent a year; consumption of dairy products at 4 per cent. Meat consumption is growing 10 times faster in newly industrialised countries than in, say, bacon-loving Britain. Poultry is the fastest growing sector worldwide; it represented 13 per cent of meat production in the 1960s, compared with 28 per cent now. Poultry is the most efficient means of converting grain into animal protein; the less palatable truth is that it is more effective to eat the grain directly.
Agricultural inflation – « agflation » in another of these modish phrases – is not entirely down to the Chinese. There are other factors. Freakish weather conditions across the world haven’t helped: hurricanes in Florida and floods in England affect the cost of the orange juice and brussels sprouts on your dining table. (Then again, China’s breakneck rush for coal-powered growth, and our own profligacy, have caused the global warming that may have intensified these storms.)
Then there’s the switch to biofuels which has pushed grain prices higher. So called « phase one » biofuels –bioethanol (a petrol substitute or additive) from grain and biodiesel from palm oil – have met with opposition from environmentalists. Palm oil production has encroached on the remaining rainforest in Indonesia. We are only at the start of the process. Credit Suisse’s economist Andrew Garthwaite points out that biofuels make up 3.5 per cent of US gasoline consumption. In January, President George Bush pledged a biofuel target of 20 per cent of US fuel consumption within 10 years. This means more of America’s corn harvest being put into the tanks of cars rather than the bellies of Mexicans, with upward effects on the price of grain: « The 35 billion gallons of ethanol required to meet the 20 per cent target will account for 40 per cent of the US corn crop by 2017, » Mr Garthwaite says. Worldwide, « the combined impact of these targets commits 238 million acres or 12 per cent of global arable and permanent cropland to biofuel production ». Crucially, though, « second generation » biofuels will use waste material and be a more unequivocally green and economical option; the stalks of grain crops rather than their seeds; surplus cellulose from paper mills; grass cuttings from your lawn.
The big picture, according to Credit Suisse, is that, globally, demand for food and biofuels will grow at about 3.3 per cent per annum – compared with the historic average of 2.3 per cent. Can supply – of food and other commodities – keep pace with a step change in demand?
It was Thomas Malthus who predicted, way back in 1798 as the West was undergoing the transformation China and India are now, that the tendency for populations to rise at a geometric rate while agricultural production rises at an arithmetic rate would constrain population growth through periodic famines. Malthus was wrong, because he failed to foresee the rapid growth in agricultural productivity – crop rotation, selective breeding and mechanisation. Agronomists are scarcely less imaginative today, yet there are political, environmental and physical obstacles which make the business of extracting more crops for fuel and food tricky. Genetic modification, for example, is viewed with deep suspicion by some shoppers, and politicians have shown themselves unwilling to take on the voters’ prejudices. Ditto the supermarkets, at least in the UK.
Apart from China, Brazil, Indonesia and Argentina have the greatest potential for increased acreage and urbanisation, but the environmental cost – itself an economic burden that will have to be shouldered –ought to restrict incursion on pristine environments. When it comes to productivity – the factor that saved the world from a Malthusian nightmare 200 years ago –things are looking a little grim. In the case of cereals, productivity has grown at only 1.3 per cent in the past 20 years.
So the outlook is for agricultural, commodity and oil prices to carry on rising. The $100 barrel of oil could be just the start. Bad news for Britain and the West – but worse for poorer peoples. Countries such as Bangladesh with large and growing populations but who are net importers of food will feel the effects badly (on top of dealing with rising sea levels in the Ganges delta). The less developed the economy, the greater the share of food prices in the shopping basket, and thus the bigger the impact on standards of living. In the West, food accounted for about 18 per cent of headline inflation in 2007; in eastern Europe it was 33 per cent, and in the Middle East 52 per cent. Everywhere, and especially in the least-developed regions, there will be a regressive redistribution of income, from the very poorest to the relatively well off, as food accounts for such an overwhelming proportion of the living costs of those at the bottom of the heap. In China that means the rural poor, already a source of anxiety of Beijing as it seeks « balanced » growth. Everywhere, pressure on water supplies and migration will inevitably follow.
We may grumble about another few pence on the price of a loaf and the £1 litre of petrol, but we should also be aware that those nations emerging from poverty –
China, India, Brazil – are exacting a heavy price on those left behind.