By Bill Emmott
We in the northern hemisphere are enjoying our summer holidays in a gloomy mood, partly because we are being joined in our gloom by some of the emerging economies of the southern hemisphere. But the most important word to bear in mind, the one that is really determining the attitudes of financial markets and even of corporate managements, is not gloom. It is risk. If you were to just look at the newly revised economic forecasts released by the International Monetary Fund earlier, you might focus only on gloom. The IMF cut its estimate of global economic growth in 2012 to 3.5%, thanks to slower growth in China, India and Brazil, but also thanks to the euro-zoneâ€™s recession. The IMF forecast a drop in euro-zone GDP this year of 0.3%, but falls of a worrying 1.9% in Italy and 1.5% in Spain. This follows global growth in 2010 of 5.3% and in 2011 of 3.9%, so plainly the trend is gloomy and downwards. The United States looks relatively healthy at 2% forecast growth this year, twice as fast as Germany (and ten times Britainâ€™s stagnant 0.2%), but even that is too slow to have much impact on unemployment as both the US population and its labour force are growing. Yet these sort of numbers take me back in time. During my time as direttore of The Economist, I remember publishing a front cover, I think in September 2002, describing the world economy as â€œin the doldrumsâ€, by which I meant it was like a sailing ship that was not moving because there was no wind. This was based on IMF forecasts of growth in 2002 and 2003 even slower than the ones it has just made. So what happened? The world between 2002 and 2007 in fact had the fastest five years of economic growth it had enjoyed in more than 40 years. It would be nice to think that could happen again, and that we would all turn out to have been much too pessimistic. It isnâ€™t impossible: the emerging economies are probably only in a temporary slowdown, caused by their efforts to reduce price inflation, and the United States has a remarkable ability to reinvent itself, as it is now doing with its oil and gas boom.
Yet letâ€™s be realistic: it isnâ€™t likely. And the big reason doesnâ€™t lie in China or in the United States. It lies in risk, or rather in the feelings that companies and investors now have about risk. Even though a war had started in Afghanistan in 2001 and was going to start in Iraq in 2003, actually companies in those days did not feel that in their businesses, in their markets, in their investments, that the risks were large. But they do now. Of course, investors and managers always worry about risk. That is their job. But the difference now is that the range of risks feel much wider, the range of possible events dramatically broader, than they did in 2002. The Arab Uprising, with civil war now under way in Syria, is one example, especially when combined with the tension over Iranâ€™s nuclear programme: this makes the price of energy even more unpredictable than usual. The welcome and helpful fall in oil prices that occurred in recent months has been partially reversed, as a result. Concerns about Chinaâ€™s economy, and about its political stability following the scandal and murder accusations surrounding Bo Xilai, former mayor of the Chicago of China, Chongqing, fall into a similar category. The worry about China is exaggerated, in my view: the governmentâ€™s capacity to support growth through monetary and fiscal policy remains strong. But at a time of general nervousness about risk, some companies do seem to be holding back their investments out of worry about Chinaâ€™s future. Even so, the biggest source of worry is much closer to home. It is Europe. The problem is not simply the fact that government debts are huge, that growth is non-existent and that there is a basic disagreement between the debtor and creditor countries about how the euro should be run. Those things are important, of course. But the real problem is that the range of possible outcomes looks so wide. How can a company plan its investments to take into account the possibility of Greek withdrawal from the euro? What percentage probability should it give to the chance that other countries might leave the euro, or that the currency might collapse altogether? What should companies think about the next Italian elections, with Beppe Grillo and Silvio Berlusconi both thinking aloud about whether Italy should leave the euro? The intellectual, or analytical answer, may be that the chances of Greek exit are high, but that the chance of other countries leaving or of a complete collapse are very low. The chance of Italy leaving the euro and defaulting on its debts is non-existent: every Italian bank would immediately collapse. Notions one often hears in countries outside the euro, especially America, of the currency splitting into two, with different common currencies for northern and southern Europe are, in my view, virtually inconceivable. Our difficulty right now, however, is that intellectual and analytical answers are not enough. Corporate boards and financial institutions have to make decisions.
So what they are doing, increasingly, in response to this uncertainty about the euro, and about Italy, is not to invest at all. They are sitting on their cash, or putting it in low-yielding, seemingly safe places such as German Bunds. This process is becoming self-fulfilling. Cash is seeping away from euro-zone economies and, for different but related reasons, from the British economy too. Investors are not doing in Greece what they would normally do after a financial crisis, namely rushing in to hunt for bargains. They think prices could fall further later, and that Greece will have a further crisis. If there is one thing that governments, especially European ones, need to think about during their holidays it is how to reduce these perceptions of risk. How can companies and investors be convinced that the range of possible outcomes is not as wide as they fear? There is plenty of cash available. It is just not being spent.