2011-2030: in a nutshell

Simon Hunt, a consultant on the global economy and specialist on China, revealed his outspoken view on the world economy between now and 2030. His distinguishes two periods: the crisis years 2011-2018 and the new real era starting in 2018. We give you a brief summary and his conclusions for the next years.

Summary

• The world is in a balance sheet depression which will make a second and perhaps more dangerous credit crisis almost inevitable. That should break out next year or in 2013.

• The three global pillars of the world economy, the USA, Europe and China each have their own problems, but their impact is global because of the feedback loops from the financial sector to the economy.

• The USA has a debt and deficit profile which is unsustainable; the Euro Zone has to decide whether it can forge a fully fiscal union or whether the costs are too great in which event membership will be restructured; and China is trying to put its economy on a more sustainable growth path at a time of leadership change.

• Debt and demographics will be the determining forces to global growth.

Markets will no longer countenance indecision and pushing debt problems under the table by lending more funds to indebted governments. Politicians want to postpone what they know is inevitable: debts must be repaid.

• European banks are under duress; government debt represents a large proportion of their asset base. They are also the largest lender to all the major regions of the world. To shore up their own balance sheets they will be cutting credits etc.

• The world will suffer from rolling recessions starting either next year or in 2013 lasting to about 2018. Global industrial production should fall by an average of 0.25% a year during this period.

• By then the process of deleveraging should have run its course. The world beyond 2018 will be a different place. World industrial production should average around 3% a year to 2030 compared with an average of 3.3% in the period 1990-2010. Monetary policy will also be quite different; global money supply will match global GDP, not the massive increase experienced since 2008.

• Asset inflation will be virtually non-existent as funds will experience solid long term growth in equities. CPI inflation will be contained at around 3% a year as a world average. This will be a golden period after the turmoil of the 2000 to 2018 years.

The near future

The period starting in 2013 – and it could be in 2012 – will be fraught as the world deleverages after a generation of governments promising more than they can pay for and in many countries households borrowing more than they can afford. This is a bad enough environment but it is made worse by society aging in so many countries: there will be far fewer workers to support retirees.

Professors Reinhardt and Rogoff have well documented what happens to economic activity in their book, "This Time is Different: Eight Centuries of Financial Folly." "The aftermath of systemic banking crises involves a protracted contraction in economic activity and puts significant strains on government resources." More recently they add that you can't get rid of debt quickly and you can't get rid of it nicely. The bullet has to be bitten meaning that debt must be repaid rather than one institution lending to another so that the latter can repay its debt.

Anyone who had listened to what the Bank for International Settlements was saying since 2005 would have been well prepared for the shocks that began towards the end of 2007 and then blew up in 2008. They are now issuing a new warning in their September 2011 report, The Real Effects of Debt. We should heed this warning.

They conclude:

"Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth (in 1st qtr 2010 USA's debt: GDP ratio was 117%)....A clear implication of these results is that debt problems facing advanced economies are even worse than we thought. Given the benefits that governments have promised to their populations, ageing will sharply raise public debt to much higher levels in the next few decades. At the same time, ageing may reduce future growth and may raise interest rates, further undermining debt sustainability. So, as public debt rises and populations age, growth will fall. As growth falls, debt rises even more, reinforcing the downward impact on an already low growth rate."

They conclude: "In the end, the only way out is to increase saving." This is part of the process of deleveraging which is likely to take until around 2018 to run its course. These years will be characterised by rolling recessions and deflating asset prices interspaced by short periods of recovery.