UK's Bew: Too soon to cheer a recovery

Editor's Note: After serving as an economist for Her Majesty's Treasury - as it is still known in the United Kingdom - Robin Bew fully understands the pressure on the economists who choose to practice the "dismal science".

"The quality of economic analysis is extremely important as policies have to be made based on it," he said at a glitzy office building in downtown Beijing's CBD area.

Bew, who joined the Economist Intelligence Unit in 1995 as chief economist, now leads a team of more than 120 country and regional specialists, providing forecasts and insights on economic issues for the world's top business leaders.

Trying to best help its clients make effective and profitable business decisions, Bew is tasked to help colleagues develop responses to events as broad-ranging as the development of Iran's nuclear program and currency turmoil in emerging markets - issues as timely as those at its sister company, the famed Economist magazine.

Yet after spending 14 years observing the economy and working with top political and business leaders, Bew concluded analysis is actually the easier task compared to making complex and sometimes controversial decisions.

"That's a lesson which is all too clear here in China now," Bew said. "There are a lot of good views about the opportunities and challenges facing the Chinese economy. The difficult bit is for leaders to decide how to take advantage of them."

During his recent trip to Beijing, Bew talked with China Business Weekly reporter Wang Xu about his views on the global economy and ongoing financial crisis and the difficult decisions policymakers face.

Q: At the beginning of the year, some economists cautioned about the possibility of a third wave in the financial crisis, but now the global economy appears to be on the track to recovery. Do we still need to worry about the so-called third wave?

A: There is a lot of talk in the press about "green shoots" of recovery at the moment, and data are backing that up. Here in China, we have seen some positive data. But genuinely, what that tells is that the pace of decline, which was very steep at the beginning of the year, has slowed. But most countries haven't actually bottomed.

We are relatively cautious about the outlook of the world compared with some other forecasters. Some of the good news we are seeing at the moment is due to two specific factors, both of which are temporary. First, during a very sharp downturn, businesses all around the world cut their inventories very sharply. Now stock levels are quite low and companies have to resume production and that inevitably cause an increase in output and hence economic growth. But whether that process can be sustained depends on whether demand is also improving.

We are not seeing that yet.

The second thing, which is also temporary, is the fiscal stimulus. Government stimulus packages are now starting to have impacts in China, the US and other countries.

Clearly that will help the world economy perform better in the months ahead. But in all countries, that government boost is only temporary and it will end in most markets probably at the end of the year. If that's not repeated, then there is a risk that growth will slow.

We think 2010 and 2011 will perhaps be weaker than many are assuming. The scale of the financial crisis we faced was very big and it's probably wrong to assume we have escaped it. There may be more pain to be felt.

Q: So you don't believe that demand from private sector will kick in later this year as the effect of government stimulus starts to fade?

A: That's the worry. Clearly, all governments around the world say and hope the stimulus they put in the place will kickstart a private sector recovery. Unfortunately, that's not what always happens. Japan in the 1990s is an example. The government repeatedly announced very large fiscal packages and the economy did rebound as a result. But as soon as those packages came to an end, Japan immediately slumped back into recession. So I think while clearly all governments say their program will drive private sector recovery, the reality is that it could be very difficult to achieve.

Q: Some people say when the crisis is over, US consumers will become thriftier and thus the export market for China will shrink. Do you think so?

A: This is a particular concern for China, as it's such a big exporter. Over the last decade, we saw in America that consumer spending was rising much faster than consumer incomes, being financed by borrowing. That borrowing will not be repeated.

So we have to assume that, going forward, consumer spending in America will grow no faster than incomes and in fact will probably grow slower than incomes, because people want to repay some of the debt they build up over the years.

That would imply much slower consumer spending in the years to come. Clearly that will make life more difficult for Chinese exporters. When consumer demand in the world's largest economy slows, that clearly will have implication son how quickly Chinese exports can grow in the long term and for the Chinese economy more broadly.

Q: So what's your forecast for the speed of Chinese economic growth over the long term once the crisis is over?

A: For the growth rate, we think when China pulls out of the crisis, it will probably grow slower than 10 percent. We don't believe that 11 to 12 percent growth can be repeated. And there is the risk that the growth rate could be lower than 8 percent.

There is a clear government policy to raise the share of domestic consumption in the Chinese economy. The government recognizes that an export-dependent and investment-dependent economy is potentially not sustainable, requiring changes that are difficult to achieve and can take a long time.

In the meantime, it will leave the Chinese with a little bit of a growth problem. America is not buying and Chinese consumers are not consuming enough. So where does the growth come from? We have been through a period of easy and fast growth. But it's going to be much tougher in the future.

Q: The Chinese government has tried for many years to reduce the economy's dependence on exports but hasn't been very successful. What measures could the government take to achieve that aim?

A: There are two elements of changing people's consumption behavior. First, people save a lot for precautionary reasons. One of the things that is uncertain in China is the healthcare system. So the government is spending a lot to improve its healthcare, education systems and so on. Another area is China's exchange regime, which favors exports and does encourage investment into the export-oriented sector. Clearly, in the short term it creates jobs but isn't necessarily a policy that aligns with other policies that encourage domestic consumption.

That is for the government quite a tricky issue to grapple with. One of the ways traditional economists thought about boosting the economy in any market is to let the exchange rate appreciate, so imports become cheaper and consumers can afford to buy more imported products. But while you are making the adjustment from an export to a domestic economy, generally you go through a period of pretty weak economic growth. Making that shift is actually very difficult.

Q: Many people are now concerned about the threat of inflation. Do you think inflation is an immediate concern?

A: There is a little bit too much excitement around short-term growth prospects. Certainly, growth is improving because of the fiscal packages. But we worries that when the package comes to an end, growth may again slow. What you see in the commodity and the equity markets is that investors are hoping some of the "green shoots" may lead to a very sharp V-shaped recovery, so they are buying risky assets.

Our worry is that their hopes may be disappointed and we may see a correction in commodity prices down the line. Some of the immediate worry about inflation driven by the commodity prices may probably fizzle out. Deflation is probably a bigger worry for us in the short term. But if you look at four or five years, however, it's right to worry about inflation. Clearly, we have supply problems for some commodities. China is continuing to grow very fast, and so is India. They are energy-hungry. That does suggest inflation in the long run.

Another thing is that the policies used by many countries potentially do have long-run inflation consequences. We are seeing that many central banks in the world are in effect printing money. While it's quite possible technically to reverse that policy when the economy starts to recover, in practical terms, none of the central banks have experience in doing this. So in terms of inflation, I am not worried for the next one or two years. But in the longer run, like five years, you do have to worry.

(China Daily 07/06/2009 page2)