Review of the year: The Economy
Rising in the East: the new Tigers
By Hamish McRae
Published: 30 December 2005
Despite just about every imaginable pressure, much of the world economy had a good year. There were high oil prices, rising US interest rates, continuing turmoil in the Middle East and the human disasters of the tsunami and Hurricane Katrina. But while for Britain, 2005 was a year of economic slowdown, and for much of the Continent growth was disappointing, for the rest of the world it was a year of real progress.
Normally, any analysis of the world economy starts with the US, or at least the developed world. But each year that approach becomes less appropriate. The centre of gravity is shifting, most obviously to China and India. We don't have the figures yet, but it may be that 2005 was the year when China overtook the UK to become the world's fourth largest economy. If not, wait a year or so.
In China, growth has been an extraordinary 9.5 per cent, despite the drag of higher energy costs and concerns about the environment. It has about 8 per cent of world trade and about the same proportion of world oil demand. Its current-account surplus has enabled it to build up nearly a quarter of the world's foreign exchange reserves, and in economics, money is power.
Thus 2005 saw China strike deals with oil-producing countries, while a state-controlled Chinese oil company sought to buy one of the few remaining independent oil groups in the US, Unocal. It was rebuffed, but expect this pattern to be repeated. US pressure for a revaluation of the Chinese currency was partly successful but only partly, for the uplift was very modest.
Chinese wealth is now transforming living standards. Consumption has risen and rural living standards, which have lagged behind those in urban areas, are also climbing, up perhaps 15 per cent on the year. Huge problems remain, but the giant races on.
The Indian economy remains much smaller than China's, and growth a little slower. But 2005 was the year when people began to talk of the two in the same breath. India now exports more to China than Japan, and though it is still attracting smaller inflows of foreign funds, many believe it may offer greater attractions than China. India grew at close to 8 per cent, with much of the extra wealth being consumed, so ordinary Indians are beginning to have a real taste of the fruits of growth.
These two stellar performances make what has happened in the rest of the world appear prosaic. Yes, the US economy threw off the burden of higher energy prices and higher interest rates. It also grew more swiftly during the period of the hurricanes than the rest of the year: more than 4 per cent as against 3.5 for the year as a whole.
This makes European growth look anaemic, but it came at a price. It was driven by US consumers, who were prepared to borrow (often against their homes) to maintain their lifestyles. It was also driven by government spending, financed in large measure by foreign purchases of US securities.
The US is going through the British experience - a boom driven by public spending and rising home prices - but in a more extreme form and about a year later. Maybe 2006 will be the year that the US economy slows, as ours did in 2005.
With Gordon Brown recently admitting that growth in 2005 will be half his pre-election forecast, people in Britain have seen the year as one of failure. But that is really a reaction to a string of years of very good growth, with living standards rising by about 4 per cent annually. From the point of view of retailers or estate agents things were glum. But inflation remained low, unemployment and taxes rose only slightly (unless you own an oil company) and interest rates fell. And if the Treasury is to be believed, there may be a pick-up in 2006.
The picture on much of the Continent was more sombre still. The rule seemed to be that the smaller the economy, the better it did. So Luxembourg, Ireland, Sweden and Spain grew. The new EU member states also had a good year, with Hungary growing by about 4 per cent, Poland a bit less - even if more new jobs were created for Polish people in Britain than in Poland.
The problem for Europe was not at the fringe but at the core. The Italian economy may have shrunk and Germany grew by less than 1 per cent, despite a brilliant performance by German exporters. Even France, which has proved resilient, again grew more slowly than Britain. Things picked up in the final three months of the year, allowing the European Central Bank to start raising interest rates, and the hope is that this improvement will be sustained.
Elsewhere, Japan seemed at last to emerge from a decade of stagnation and Russia grew well on the back of the higher energy prices, but continues to suffer from capital flight. Argentina and Chile had a boom, Mexico and Brazil were more muted. South Africa managed to sustain solid growth but much of the rest of the continent suffered higher imported energy costs.
Overall, 2005 was a year of progress. Politicians argued about world trade and the future of Europe, but most of the world just got on with it: making things, generating services, buying and selling. That is, after all, what it is supposed to do.
