Amina, a Moroccan muslim, picks her way through the thronging streets of
Marrakech’s ancient Medina area. A town dweller all her life, Amina has worked hard and now manages a smart, but discreet, small hotel (Riad) in the east of the central area. She has witnessed considerable change over her life, particularly so over the past twenty years. During the past two decades Marrakech, rich in history and famously associated with the demi-monde of the late 1960’s early 1970’s, has undergone a profound transformation, in large part a function of Morocco’s evolution as an important tourist destination, particularly for broad-minded European travellers.
Global downturn: threat to tourism industry
But Amina is worried. She doesn’t know quite why she’s worried but she senses something different. She senses a certain circumspection amongst those around her. Something she hasn’t noticed for a good five or six years. Amina is right to be worried. A million light years from her pastoral lifestyle, the cogs of the global economy grind on remorselessly but… more slowly than they have of late. Amina’s circumspection is shared by a good many across Europe and the rest of the world.
Pierre, an ex-pat Frenchman, has just started a small business on the edge of town. He wears a furrowed brow too. His business, hiring Quad bikes to thrill seekers in the Moroccan desert, is just three months old. He is still trying to establish himself but business is slow and costs, particularly staff and fuel costs, are high and still rising. Pierre is concerned that the trickle of curious visitors has not yet turned into a flood. Pierre is exposed not just to the inevitable slow-down in tourist travel to the country but
also to the vagaries of the international energy market. He too is right to be worried. The prospects for him and those like him who have eked out a living on the back of rising affluence elsewhere are uncertain indeed. It’s no fun when you’re operating at the sharp end of a global economic slowdown.
There are very significant differences between Amina and Pierre. Perhaps the most significant is that Amina has assiduously built her business over many years, has weathered the good and the bad times and has established something sufficiently robust as to be able to withstand the onslaught of another global economic downturn. Pierre’s business is new, created at the pinnacle of global economic output growth which, earlier this year, hit a thirty three year high! After growth of 5.3% in 2004 and
4.8% over 2005, the global economy is scheduled to deliver something in excess of 5.1% again this year. But, as we have commented at length in the recent past, much of the incremental growth is being derived from China, India and their booming satellite economies…and there aren’t many Asian visitors to Marrakech just yet!
Gliobal downturn: probability of a hard landing
Booming growth has inevitably led those steeped in the gloomy science to worry about the likelihood of bust thereafter. Spiking energy prices could still, if maintained, prove the trigger for an economic “hard landing” next year.
Note that global growth has remained strong throughout the period in which oil prices (and gas prices) have been rising strongly. Clearly heightened geo-political tension has added some risk premium in the futures markets, although it remains difficult to establish exactly how much. Certainly supply concerns, coupled with ongoing fears regarding refining capacity, would not be so poignant were underlying demand not so robust.
However, rising energy prices, coupled with rising raw material prices generally have caused developed countr central bankers to fret about possible inflationary consequences (although notorious “second round” effects such as wage push inflationary pressure remain notable by their absence). Eager to head off an inflationary fire storm, base rates have been raised and in the case of the US, raised aggressively. It is this confluence of rising energy prices and rising base rates which leads some to fear a rapid descent into the maelstrom in 2007.
Global economic downturn: interest rate hikes
Now that the US Federal Reserve has paused in its seemingly remorseless tightening process (whilst maintaining its bias towards further rate hikes) investors are nervously anticipating a period of pause. Historically, pause periods tend to last between six and eight months, however, such has been the pace at which the formerly accommodative position has been withdrawn that concerns regarding the lagging impact of earlier rate
hikes on future growth may yet cause the world’s economic engine room to slide below the water.
Financial markets, eager to ascribe a probability to anything that moves, are indicating a 40% probability that the US might experience a “hard landing” from Q2 2007. Were base rates to be raised again over the autumn that probability would rise in excess of 60%. Were base rates to be raised, and not to be cut for the first time in a new cycle in January 2007 the probability ascribed to a severe downturn would rise to an astonishing 70%!
By Jeremy Batstone, Director of Private Client Research at Charles Stanley