Sunday Herald
Sunday Herald - 18 December 2005
The year we watched the rise of oil, gold, China and India
Business Leader
http://www.sundayherald.com/print53328
IF you looked at 2005 from a distance you would scarcely believe that the oil price shock – which saw the price of crude break through $70 per barrel in the aftermath of Hurricane Katrina – would have such limited economic effects.
Compare it to the earlier oil spikes of 1973 and 1980 which provoked severe bouts of “stag flation” (a nasty combination of recession and high inflation) which paralysed the global economy for several years afterwards.
There are two main reasons why high oil prices, which have been matched by dramatic rises in the prices of many other commodities this year, have not led to a similar scenario this time around.
The first has been that central banks responded in a much better fashion to higher commodity prices, gradually raising interest rates – or at least hinting at higher rates – in a bid to ease inflationary pressures on the wider economy. The US Federal Reserve last month raised its short-term rate to 4%, the highest level in more than four years.
The second reason is globalisation, which has itself been made possible by the end of the cold war and the opening up of the Chinese and Indian markets.
Back in the 1970s and early 1980s, national economies were like giant silos, and therefore far more susceptible to pricing pressures at times when energy prices went through the roof.
In today’s more globalised world, both production and services are more mobile and trade union power has to a large extent been emasculated.
Production can therefore be transferred to places, such as India, where unit labour and other costs are significantly lower.
Mirroring the rise in oil this year has been a parallel rise in the price of gold. Lovers of the shiny metal have driven the price up to more than $530 per Troy ounce, largely because of their fears of a return to inflation and their lack of faith in the stewardship of the developed economies. In an uncertain global environment, they view gold as a deeply reliable hedge.
But, this time, they might have made the wrong call. Inflationary pressures have come off the boil since the summer, as the $10 per barrel drop in the price of oil since the summer starts to work its way through the system.
Energy efficiency is also playing a part in ensuring inflation has not followed the oil shock. A further reason why developed economies have been more able to accommodate high oil prices is because the shift from manufacturing to services means they are much less energy-intensive. While oil imports represented 3% of the GDP of OECD countries in 1980, they account for just 1% today.
Competition and productivity improvements have further ensured the knock-on effects have been much more muted than the doomsayers feared. Global economic growth of 4.25% in 2005, as predicted by the World Economic Forum, is a creditable performance at a time of such uncertainty.
Another big story of 2005 has been the continuing remarkable growth of the economies of India and China. They are expected to grow at 7% and 9% respectively in 2005, despite their dependence on imported oil.
Scottish businesses that neglect the opportunities presented by these two economic powerhouses – either as a manufacturing base or as a consumer market – might well be missing a trick. Particularly when we have just passed another global economic milestone. Last week it emerged that following a revision by Beijing statisticians, China’s GDP in 2004 in fact reached £1.13 trillion, a whisker ahead of the UK’s £1.11 trillion, making it the fourth largest economy in the world.
But China and India may also represent a real threat to our future economic wellbeing. Chancellor Gordon Brown recently warned that the two countries between them are training more engineers, computer scientists and university graduates – four million a year – than Europe and the US combined.
Can the global economy continue to grow and the new challenges be met without the protectionism of a “fortress West” mindset among the developed economies?
At year end the omens do not look good. The strains imposed by shifts in global economic power were bubbling to the surface in Hong Kong this weekend, where the crucial World Trade Organisation talks are said to be “in peril”.
This is a result of the intransigence of the European Union, which is resisting calls to end its agricultural export subsidies by 2010, and US reluctance to give duty-free and quota-free access to goods from the world’s least developed countries.
Without such concessions, the current Doha round of trade talks is unlikely to culminate in a fairer trade treaty next year. It would prove an unfortunate end to the economic year.
Copyright © 2005 smg sunday newspapers ltd. no.176088
Back to previous page
The year we watched the rise of oil, gold, China and India
Business Leader
http://www.sundayherald.com/print53328
IF you looked at 2005 from a distance you would scarcely believe that the oil price shock – which saw the price of crude break through $70 per barrel in the aftermath of Hurricane Katrina – would have such limited economic effects.
Compare it to the earlier oil spikes of 1973 and 1980 which provoked severe bouts of “stag flation” (a nasty combination of recession and high inflation) which paralysed the global economy for several years afterwards.
There are two main reasons why high oil prices, which have been matched by dramatic rises in the prices of many other commodities this year, have not led to a similar scenario this time around.
The first has been that central banks responded in a much better fashion to higher commodity prices, gradually raising interest rates – or at least hinting at higher rates – in a bid to ease inflationary pressures on the wider economy. The US Federal Reserve last month raised its short-term rate to 4%, the highest level in more than four years.
The second reason is globalisation, which has itself been made possible by the end of the cold war and the opening up of the Chinese and Indian markets.
Back in the 1970s and early 1980s, national economies were like giant silos, and therefore far more susceptible to pricing pressures at times when energy prices went through the roof.
In today’s more globalised world, both production and services are more mobile and trade union power has to a large extent been emasculated.
Production can therefore be transferred to places, such as India, where unit labour and other costs are significantly lower.
Mirroring the rise in oil this year has been a parallel rise in the price of gold. Lovers of the shiny metal have driven the price up to more than $530 per Troy ounce, largely because of their fears of a return to inflation and their lack of faith in the stewardship of the developed economies. In an uncertain global environment, they view gold as a deeply reliable hedge.
But, this time, they might have made the wrong call. Inflationary pressures have come off the boil since the summer, as the $10 per barrel drop in the price of oil since the summer starts to work its way through the system.
Energy efficiency is also playing a part in ensuring inflation has not followed the oil shock. A further reason why developed economies have been more able to accommodate high oil prices is because the shift from manufacturing to services means they are much less energy-intensive. While oil imports represented 3% of the GDP of OECD countries in 1980, they account for just 1% today.
Competition and productivity improvements have further ensured the knock-on effects have been much more muted than the doomsayers feared. Global economic growth of 4.25% in 2005, as predicted by the World Economic Forum, is a creditable performance at a time of such uncertainty.
Another big story of 2005 has been the continuing remarkable growth of the economies of India and China. They are expected to grow at 7% and 9% respectively in 2005, despite their dependence on imported oil.
Scottish businesses that neglect the opportunities presented by these two economic powerhouses – either as a manufacturing base or as a consumer market – might well be missing a trick. Particularly when we have just passed another global economic milestone. Last week it emerged that following a revision by Beijing statisticians, China’s GDP in 2004 in fact reached £1.13 trillion, a whisker ahead of the UK’s £1.11 trillion, making it the fourth largest economy in the world.
But China and India may also represent a real threat to our future economic wellbeing. Chancellor Gordon Brown recently warned that the two countries between them are training more engineers, computer scientists and university graduates – four million a year – than Europe and the US combined.
Can the global economy continue to grow and the new challenges be met without the protectionism of a “fortress West” mindset among the developed economies?
At year end the omens do not look good. The strains imposed by shifts in global economic power were bubbling to the surface in Hong Kong this weekend, where the crucial World Trade Organisation talks are said to be “in peril”.
This is a result of the intransigence of the European Union, which is resisting calls to end its agricultural export subsidies by 2010, and US reluctance to give duty-free and quota-free access to goods from the world’s least developed countries.
Without such concessions, the current Doha round of trade talks is unlikely to culminate in a fairer trade treaty next year. It would prove an unfortunate end to the economic year.
Copyright © 2005 smg sunday newspapers ltd. no.176088
Back to previous page
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