A Tipping Point in the Global Economy?

stones by the ocean2,500 leaders from business, government and civil society met in Davos for the World Economic Forum annual meeting last month. This year’s theme was a call to action for decision-makers to "Improve the State of the World: Rethink, Redesign, Rebuild". Leaders participated in over 200 working sessions on topics including Haiti, the Millennium Development Goals, the environment and the global economy.

Whilst many of the developed world’s economies struggle to emerge from recession, high growth emerging markets such as China, India and Brazil have hardly missed a beat. Why is this - and what are the implications for businesses and economies in the developed world? At an international conference we recently facilitated for one of the world’s largest banks, its Chief Economist focused on a much overlooked economic factor  - global commodity pricing!

- In recent global recessions, developed economies in US and Europe have effectively exported their economic problems to other countries by reducing their demand for commodities. Raw material producers, mostly to be found in the emerging world, would suddenly find themselves with falling demand and prices. The relative value of the national currency would in turn fall, increasing national debt and further accelerating falling prices. This was tough for emerging market economies but for developed economies cheaper commodity prices and more favourable exchange rates for imports fuelled the pace of their recovery. But not so this time around.

- China and other high growth economies are re-writing the fundamentals and the relationship between the developed world and the price of raw materials in a recession. Global commodity prices have not collapsed this time and China alone has become the second biggest consumer for many strategic raw materials such as oil and high value metals, and their economy has continued to grow at 9%.

- Some commodity producing nations in the developed world such as Canada, Norway and Australia have also benefited. But the US, UK and other financially-challenged nations are struggling to recover and home grown economic difficulties are now more likely to stay at home. There is no longer an easy way to export the cost of recovery through falling commodity prices.

That is not to say that economic recovery is doomed, it is simply another reason for us to conclude that the rate of recovery in many developed economies is likely to be slow and some might say austere. Many developed economies are also wrestling with the consequences of an aging population, rising social costs and an inefficient industrial infrastructure.

We have heard a lot about the cost of quantitative easing, bank bailouts and their implications for public financing and taxes but we currently hear little about the powerful impact of commodity prices on the shape of global economic recovery. Supply and demand for the earth’s resources also underpin many of the sustainability and resource challenges world leaders are being asked to consider when “rethinking the state of the world at Davos”. So what are the implications for your business, markets and customers and how are your business leaders responding?

China and other high growth emerging economies are already busy rebuilding and redesigning the world economy – the supply and demand of scarce raw materials and their economic and social price will be a central challenge. This recession has clearly accelerated the approach of a “Tipping Point in the Global Economy” and the relative political power of the players – some might conclude it has already passed?

Geoff Rogers, Director
Value Partnership LLP

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