x Abu Dhabi, UAESaturday 22 July 2017

Fighting complacency as skies clear

Steen Jakobsen, the chief economist of the Copenhagen-based Saxo Bank, assesses the current health of the euro zone, the United States, Asia and the Middle East.

A pedestrian wheels her shopping trolley past jobseekers queuing outside an employment centre in Sintra, Portugal. Mario Proenca / Bloomberg News
A pedestrian wheels her shopping trolley past jobseekers queuing outside an employment centre in Sintra, Portugal. Mario Proenca / Bloomberg News

From New York to Nairobi, global stocks have rallied since the start of the year as hopes grow that the world economy may be out of the woods. But potential pitfalls still lie ahead; from the US budget talks to the fallout from Italy's elections. Here, Steen Jakobsen, the chief economist of the Copenhagen-based Saxo Bank, assesses the current health of the euro zone, America, Asia and the Middle East.

 

More than two months into the year, how optimistic are you about the global economy?

As we come to the end of the quarter, people will realise the unsustainability of having a stock market on a high and an unemployment rate on a high. That needs to be addressed in one of two ways. Either the economy can improve massively, which I doubt, or you need some sort of correction of expectation. The key word for quarter one is complacency. I have not seen this level of complacency politically, economically and market-wise since 1999, just ahead of the 2000 bubble.

 

So you think we are in a dangerous position at the moment?

Dangerous is a strong word, but we are in a complacent situation. The words and action of Mario Draghi [the European Central Bank president] has reduced the interest rate for the peripheral euro-zone nations.

Politically is that good or bad? It's extremely bad as the propensity for any reform has been delayed by another six to 12 months. That's what the market reacts to as with interest rates in the peripheral going down.

People think we can go all the way through to the German election in September with no hiccup. That is a dangerous assumption that nothing will happen in nine months with Europe. I can't remember when we had nine months of non-political issues in Europe. It's dangerous to assume that Europe is in a place where it can remain.

We can't continue with the unemployment rate rising. Europe is contained. The only thing we have done is deleverage the private sector and bloated the public finances of Europe so the debt is unchanged and has just gone from the private to the public sector.

 

What about the US economy?

First of all we have only done 20 per cent of the budget negotiation and the real test will be the fiscal spending cuts, which will be a big battle.

But the consensus is that the ultimate solution will be a drag of 1.5 per cent on GDP. We have positive effects like the easy monetary policy, massive shale and infrastructure investments to the tune almost of 1 per cent of GDP. The housing market has stabilised, which will mean it is not a drag and will move to a positive.

You can say that with all things being equal you're probably looking at a growth similar to last year. But as we pass from this year to next year I'm positive for several reasons.

The first is that the US is mainly producing electricity from the use of natural gas and US natural gas is trading at a 10-year low, meaning a lot of companies, in particular those impacted by energy use, are refocusing back to the US.

Over the course of this year you will see a lot of companies repatriate their money and capital back to the US due to the fact the US is now critical. The US is in a position to do something constructive, which is not true of a lot of companies in Asia.

 

Are you also positive on Asia?

There is a cyclical change in Asia where the big and more mature business models in Asia - China, India, Vietnam - are reaching saturation point in terms of how much growth they can generate per dollar they put into the system. The World Bank has a rule of thumb that when you reach [income of] US$4,000 (Dh14,692) per capita, growth tends to trail off because going from being an economy that's based on farming to semi-industry can create 10 to 12 per cent growth every year, but once you have a large middle class, growth tends to level off to a natural speed limit of 5 to 6 per cent.

We have seen it already in South Korea and Taiwan. They are, however, substituted by countries like Malaysia and Thailand and Indonesia, which are below $4,000 per capita GDP and are still developing their business model and increasing the movement of capital and investment and industry.

We see a systemic change. But the problem is that China is so much bigger than the second biggest nation, India, which is so much bigger than the third biggest economy.

 

You recently returned from a trip to China. Is the Chinese locomotive building up speed once more?

I was in Asia last week and clearly every businessman in China says business is up on last year, but this is traditional Chinese growth, so it is growth created out of credit rather than real economic activity.

That is something that will not impact the world in the next one or two years, but people need to realise that since 2010, China's credit growth is outpacing the real economic activity growth. In a balanced economy, you have a balance between economic and credit growth.

 

Where do you see the Middle East fit within this outlook?

Of course, European growth being weak is a challenge for the tourism industry in the Middle East. The region is doing what it does best and increasing infrastructure investments. As a trader you have to question the timing, with the world's lowest interest rates and the stock market back at index 100, is that the time you want to initiate a new project? But that is only the trader in me. The biggest player in the region, Saudi Arabia, has a different issue to the UAE. Here in the UAE you have 80 per cent expats and 20 per cent locals. It's the other way around in Saudi Arabia.

They have the fastest growing under-25 age group in the world who need education, housing and jobs. It's a huge challenge but a huge opportunity to change its dynamics. Strategically, the region needs to think about shale gas as a true paradigm shift. If it is, you have to assume energy prices will fall, especially inefficient carbon dioxide intense crude oil, which will be reduced in relative importance to natural gas [and] tar sands.

The US produced more domestic oil last year than it did since the 1970s or 1980s. We need the long-term strategic answer to oil as a revenue generator. Saudi Arabia is only going to expand its oil production. The handover to alternative energy sources needs to be built.

 

Are you worried this might be unsustainable?

If I was a finance minister in the Gulf, I would be focused on building reduced finance from oil into my spreadsheet. I would simulate how to generate the alternative investments to work on a micro-level.

For example, maybe readdress the permanent residency issue to help drive long-term investment. You need a proper handover from the public to the private sector. This region also lacks a deep capital market.

 

tarnold@thenational.ae