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Reasons for optimism about the long term

By Frank-Jürgen Richter

Business Times, 29 January 2016

Not only is the planet’s rotation slowing down because of tidal forces between Earth and the Moon, so is its economy. Roughly every 100 years, the day loses about 1.4 thousandths of a second, but perhaps more urgently for us the International Monetary Fund (IMF) forecasts a lowering of global GDP growth next year – down to 3.4 per cent, compared to a 3.6 per cent forecast last October. In both cases these are small changes, but small is important – as China’s proverb about butterfly wings’ movement suggests.

At present, the great issue for the world’s economy is overcapacity. As every manufacturer knows, for each of their products, supply chains are difficult to design. But globally, the chains from minerals to delivery of consumer products as well as delivery of fuels to heat our homes and factories is nigh on impossible to align perfectly. I will illustrate this via the world’s shipping industry.

Bulk carriers for minerals like metal ores or coal are retired and new ones built on a cycle. Over 2010-2013, there was too little capacity; now, huge new ships are too large to berth at most ports and through recent launchings there is now overcapacity. According to the Baltic Dry Index (a data tracking firm), such ships can be hired for £3,000 (S$6,130) per day – a price well below operating costs, yet accepted by owners just to keep the supply chains moving.

At the end of the manufacturing chain are the container ships delivering to ports and thence to the end-consumers. In 2005, there were 171million gross tonnes of shipping; now, there are 410 million tonnes afloat and looking for work, of which there is little on offer. Some shipping lines scrapped or sold on their older vessels and commissioned new ones capable of carrying nearly 20,000 containers. They cited economies of scale and lower fuel consumption per container, and thus lower per end-item cost, as design factors.

And in the middle of the long chain of manufacturing to end-sales are the fuel transporters – of which there were too few, and now too many. Yet energy trade remains buoyant as we all continue to demand more oil, LPG and gas as fuels for our heating, transportandfor electricity generation for manufacturing.

All in all, world trade volume grew in 2014 by 2.8 per cent – similar in fact to the growth in world GDP, whereas trade volumes used to exceed GDP growth by about 2 percentage points per year.

Many commentators point fingers at China for causing this slowdown. And, naturally, as the second biggest (maybe now the top) global economy, its economic performance matters to the world of investors. But this present economic slowdown is global and has been caused, not by unique events – like the US-initiated global financial crash of 2008, which was weathered by China – but by a wide range of issues. These have all caused investors to be anxious.

The very short-term financial worry concerns contagion and, consequently, a rapid selloff of shares across the world. I have mentioned elsewhere that the Chinese indices of manufacturers’ sentiment, while under the 50-level (that is, the boundary between growth and recession) has been growing slowly long-term since 2010. Notwithstanding fluctuations within statistical boundaries, new monthly data causes undue alarm in the media. But we must look at trends, not monthly data.

The focus on micro data has shifted attention away from long-run developments, and typically household survey data and micro data in general. The “long run” based on these sources is quite limited, usually covering less than the last couple of decades. Such a relatively short time span is unfortunate since analyses of economic development and structural change require a much longer time horizon.

Moving on, successive Chinese ministers have stressed their country’s long-term outlook. More recently, we have seen China build 200 or more massive new towns, and heavy investment in a vast transport infrastructure. An extension of its investment has been its One Belt, One Road (OBOR) initiative announced by President Xi Jinping when he visited Central and Southeast Asia in September and October 2013.

Now, we read of his further commitment to infrastructure investment, in Egypt and generally across the Persian Gulf nations. In a speech to the Arab League in Egypt on Jan 21, he said “the key to overcoming difficulties is to accelerate development”, stressing that issues in the Middle East may have arisen because of a lack of development capacity. So a solution could depend on development.

Clearly, business managers have noted the relative lack of market response to central bankers’ economic stimuli following the financial crash. And they have noted the lack of lending- on of cash hoarded by retail banks. Even so, they have not invested their own firms’ money in new capital development. Thus firms, as well as banks, are guarding piles of cash and so hinder GDP growth predicated on a more efficient infrastructure. What they are waiting for is someone who indicates firmly that growth, not recession, will indeed take place – and that someone seems to be President Xi.

China’s expansion of its own infrastructure – with its foray overland with the OBOR across Central Asia and also by sea to help modernise several ports by linking them to hinterland transport renovation, and now its support for the Gulf region’s infrastructure – must shore up hope. China has a large coffer of sovereign wealth but it is not an infinite stock; other nations should support this initiative – such as the US, which needs to modernise its own massive transport infrastructure installed as far back as the 1960s.

Infrastructure development is perhaps the province of governments. But, following on, entrepreneurial innovators should avail themselves of the new flow lines and develop efficient modern factories, hospitals and schools to regenerate for the future. I am quite optimistic of the longer-term future; let’s hope that hotheads don’t upset the short term.

The writer is founder and chairman of Horasis, a global visions community