The World Economic Forum, held in Davos, Switzerland, at the end of January each year is a good barometer of how global business leaders and financiers view the world’s economic prospects for the year ahead. Not surprisingly, the ‘mood music’ emanating over the course of the last couple of years has been pretty low key to say the least.
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This year, however, with robust growth in key emerging markets, an apparent end to the banking crisis, or at least a stabilisation, and recent signs of a growing US economy, albeit as a result of a renewed policy of fiscal stimulus, delegates emerged from the Forum at the end of last week exhibiting a degree of optimism.
However, despite this air of positivity, for many, away from the warm and fuzzy alpine glow of Davos, the economic outlook across all regions is not entirely convincing and the Forum’s vague theme of ‘shared norms for the new reality’ would appear to underline this uncertainty. The global recovery is heavily biased towards China, India and a host of emerging economies, that are currently experiencing vigorous growth. This is in stark contrast to developed nations that, in terms of growth, lag far behind and remain vulnerable to the threat of runaway inflation, exchange rate fluctuations and the rise of trade protectionism to name but a few potentially troubling scenarios.
If one message did emerge loud and clear from Davos it was the recognition that economic power is shifting from the west to the east and that the process will undoubtedly accelerate over the foreseeable future. For business leaders and financiers attempting to interact commercially with these emergent nations, the level of uncertainty and volatility is heightened by the ‘unknown’ factor. These are countries that have fundamentally different economic and political models leading to far greater risk for investors used to operating in their traditional markets in the developed world. But engage in these markets they must.
Gerard Lyons, Chief Economist and Group Head of Research at Standard Chartered, discusses this shift toward the eastern hemisphere in a recent report,1 identifying not a ‘new reality’ but a ‘new world order’. He ascribes this movement to the continuation of a ‘super-cycle’ which commenced in 2000 and in its first 10 years has already lead to a doubling of the world economy. He predicts that this will grow further over the course of the next 20 years from its current level of US$ 62 trillion to US$ 300 trillion in 2030. Lyons defines a ‘super-cycle’ as, ‘a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation and characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world’. These growth rates are already evident within emerging economies that currently account for just one third of the global economy but a staggering two thirds of its growth.
For the developed world, this new world order is both a challenge and an opportunity. Business leaders must recognise this pattern and react accordingly if they are to benefit from this changing global economy. It is only those who can adapt quickly and have something valuable to offer, be it finance, natural resources or specialist services that will flourish alongside the burgeoning new economies of the east.
Of course, with steadily increasing growth in Asia, soaring commodity prices are never far behind. Last witnessed in 2008 just prior to the global recession, the pressure is back on everything from food prices to steel and of course oil, not helped by the recent unrest across North Africa and the Middle East. At the time of writing, Brent crude had just surged above US$ 100/bbl, a more tangible sign perhaps of things to come in 2011….