The race to recovery in the global economy is proving uneven. China, India and other emerging markets are speeding by in the fast lane, with the US economy trailing at a more modest rate. Trundling along in the slow lane, meanwhile, is much of crisis-dogged Europe.
Stephen King, the group chief economist and global head of economics and asset allocation research at HSBC, believes further obstacles lie ahead on the road to recovery, especially in the West. Here, he talks about the risk of a second "lost decade" in the West, why demand for oil will remain robust in the long term and how he takes account of risks ranging from Korean peninsular tensions to Syria's civil war.
Do you think the worst is behind the global economy now?
I would like to think the worst is behind us but there are still some difficulties out there. They are slightly longer-term difficulties than those in 2009. They relate to an absence of decent growth as the pace of recovery in the western world is still too weak. Even in the US, where the growth is better than in Europe, the pace is still unusually weak by historical standards. The problem with low growth rates is they create a debt dynamic which is deeply uncomfortable and creates questions about how governments will deal with the continually large debt-to-GDP ratios. I have a new book coming out called When the Money Runs Out, which is about how the growth rates are too low to support the entitlements we built up for ourselves over the last few years.
1. The West
Presumably, that is likely to result in a lot of financial pain for a lot of people in the West. What is the endgame of this?
One of the difficulties is that we in the West have been trying to live beyond our means for too many years. The way governments deal with that currently is to assume much faster growth in the future. But they've been making those assumptions for the past three or four years and getting it wrong every single time. In the West, we have been through a lost decade and now there's a risk of a second lost decade.
We had the Cyprus crisis playing out in recent weeks and now the focus of investor angst has shifted back to Greece once again. When will we return to some stability in Europe?
The simple answer is when there's some sort of political and fiscal union. The difficult answer is, when will that be? When you look at the history of monetary unions those that typically survive have some sort of fiscal and political union as well. Whether it is the formation of Germany from its constituent states or whether it's the creation of the UK with the union of England and Scotland in 1707, in these cases there was not just a monetary relationship but also some kind of political and fiscal union as well. But ultimately, if you have a fiscal and political union you have to deal with the issue of excessive debt and who pays for that excessive debt. Is it the debtors of southern Europe who are compelled to austerity for decades to come or are there losses for those in northern Europe?
How much are the UK's problems related to the euro zone and how much are of the UK's own making?
The hope a few years back was that given its own independent monetary policy, the UK could avoid the difficulties in the euro zone. Clearly, that has not been true. Part of the problem is that the UK is very dependent on exports to the euro zone so the UK will be weak even with a softer currency. Partly it relates to the fact the credit system in the UK is not working very well, so despite all the quantitative easing there's been a lack of credit expansion. Also, there's been a problem caused by productivity gains being remarkably weak in recent years. It suggests the fall in the exchange rate may simply have encouraged less efficient firms to remain inefficient so [they] have been able to hoard labour and stay in business, which is very good news but may mean by subsidising inefficient firms it is more difficult for efficient firms to expand.
You've previously warned of the Japanisation of the US economy as GDP growth stagnates and debt mounts in a similar way to what happened in Japan. Is this still a risk?
It is still a problem. What has happened so far is the equity and other asset markets have risen a long way, in line with previous recoveries from recessions, but the economy has not done so. As a result, there's a gap between the hope built into financial markets and the reality itself. The main problem is not-sufficiently-strong growth and a poor fiscal position. Put the two together and you have continued uncertainty about how the US government will deal with what's effectively an unstable and unsustainable fiscal position. The reality is the US economy has a long-term growth of maybe not much more than 2 per cent in real terms, whereas typically people have assumed for growth of around 3 per cent.
2. The East
What's your outlook for the Chinese economy this year? Is the recovery under way?
The purchasing managers' index now points to a return to some sort of reasonable growth this year and given the infrastructure plans now in place and given the pick-up in trade we think there's every chance China will grow at 8.5 per cent maybe this year and next year. That's above consensus but it's still well below the kinds of growth rates China was achieving before the financial crisis and also consistent with the fact China's demographics point to a gradual slowing in the years ahead. But the important thing to stress is that because China is much bigger than it used to be, 8.5 per cent still makes a very sizeable contribution to global growth.
Do you think the shale gas push risks a collapse in oil prices in the medium to long term?
The interesting thing is that oil prices have remained relatively buoyant, which given that shale gas has been the dominant story in many ways recently is puzzling. But it comes back to the fact that energy prices are affected not just by supply factors like shale gas but also demand factors like the Chinese consumer. If you look at China's per capita income today and changing consumer tastes that are likely to come in the years ahead, China might be trying to consume by 2035 the equivalent of all of today's oil production. Given the demographics, there's every chance that Middle East consumers will be using a lot more energy too in the years ahead. Put the Chinese and Middle East stories together and you have significant future demand for oil still to materialise.
From the tensions between North and South Korea to the conflict in Syria, geopolitical risks to the global economy are omnipresent. As an economist, how can you factor such risks into your macro forecasts?
The answer is with great difficulty. It comes back to the famous Donald Rumsfeld dictum of known knowns, known unknowns and unknown unknowns. There are always uncertainties out there, always difficulties out there and the current situation now is no different. Some occasions have a lasting economic impact and others don't. The oil shocks of 1973 and 1979 led to a quadrupling and then a doubling of oil prices on a sustained basis. With the Iraqi invasion of Kuwait oil prices spiked and then came straight back down immediately afterwards, so the effect was fundamentally different. We are always aware what these risks are but it's difficult to have a central view.