Wednesday 5 January 2011

HSBC and world of 2050

The start of the year is the traditional time for publishing forecasts, but this one from HSBC seems particularly note-worthy, if only for the degree to which it is at variance with other forecasts. Essentially the report, which is based on the theoretical work of Harvard professor Robert Barro, foresees a US/China-led super-boom despite the doom and gloom currently seen in most corners of the globe except India and China:

"In a sweeping report entitled "The World in 2050", the bank said China would snatch the top slot as expected, but only narrowly. China at $24.6 trillion (constant 2000 dollars) and the US at $22.3 trillion will together tower over the global economy in bipolar condominium - or simply the G2 - with India at $8.2 trillion far behind in third slot, and parts of Europe slithering into oblivion. "

Robert Barro, who in 2005 predicted a 20-30% appreciation in the value of the Yuan against the dollar which is indeed what eventually happened
, has a not-too-bad record for accurate predictions. In the HSBC report, demographics are seen as key to long term economic health:

"America's high fertility rate (2.1) will allow it too keep adding manpower long after China's workforce has begun to contract in 2020s and as even India starts to age in the 2040s.

. . . .

The low fertility of Korea (1.1), Singapore (1.2) Germany (1.3), Poland (1.3), Italy (1.4), Spain (1.4) and Russia (1.4), more or less dooms these countries to aging crises and population decline unless they open the floodgates to immigration.

Japan is already deep into this phase of atrophy, explaining why the country has had such trouble shaking off the effects of the Nikkei bust. Its total population began contracting outright since 2005. It shed a record 120,000 last year, and will shrink 37pc by 2050."

All the same, other forecasts published recently have taken a far more gloomy view of the future for the non-BRIC countries. The Economist's "World in 2011", for example, had Chinese GDP surpassing that of the US by 2027, and the combined GDPs of the BRIC countries surpassing those of the G7 by around 2033. The author of the Telegraph's report on HSBC's predictions, Ambrose Evans-Pritchard, predicted misery all-round in this editorial:

"China and India are over-heating, faced with a 1970s choice between choking credit or the onset of stagflation. If they choose the latter to buy time, the politics of food will turn on them with a vengeance.

Vietnam will have to rescue its banking system, kicking off the Asian hard-landing of 2011-2012. The Aussie dollar will come back to earth.

Dylan Grice's rule of thumb at SocGen is that regions coming off a "good crisis" -- Japan in 1987, the US during East Asia’s 1998 blow-up, Chindia this time -- typically pop about two and half years later. The reason they have a good crisis when others bleed is because momentum from credit follies and/or hubris overpowers the external shock, but that contains the seeds of its own destruction.

Speaking of rules, the Atlanta Fed’s law is that every year of debt-based boom is roughly offset by equal years of debt-purge bust, which means a Lost Decade for the old world. I doubt the West will recover soon enough to pick up the growth baton before the East hits tires. We may then have a "sub-optimal equilbrium", that modern euphemism for a trade depression."

From my own amateur point of view, the HSBC report seems to err in assuming that demographic changes cannot occur rapidly. It seems unlikely, for example, that the relatively high birth-rates found in the UK and US will continue until 2050, particularly as they are driven by immigration which is itself fuelled by the difference in living standards between developing and developed nations which is sure to decrease with time. And this is even without pointing out the acknowledged limitations of the HSBC report, which assumes that problems in energy and food production are solved, and that a global environmental catastrophe is avoided.


Anonymous said...

Great post FOARP.

Long-term predictions determined by demographic changes are all very well, but they will always be trumped by far more immediate concerns about food security. And the latter is China's Achilles heel.

Environmental degradation and extreme weather patterns are well and truly affecting the price of basic food staples in 10 and 11.

Uncontrolled food inflation in turn impacts on social harmony, and once disharmony reaches a critical mass, all long-term predictions are reduced to so much statistical hot air within a glossy folder.

Also, I would be paying attention to Evans-Pritchard's other points about credit binges and refer readers to Victor Shih's blog.

King Tubby

Anonymous said...

A supplementary rant if I may re: computer future modelling. Recall the SARS so-called epidemic in 02.

All those WHO and other epidemiologists flying into Beijing with their facemasks and pcs overloaded with stat modelling programs. After a bit of nifty keyboard activity, they were throwing out predictions ranging from a 100,000 + deaths to the total demise of China as we know it.

Reality check. Three deaths in Fujian where I lived and about 400 in the rest of China, and this was after a critical denial period by the Chinese authorities.

Types who thinks they can model the future are self-important pseudo-academics, and their pay scale should be tied to the success or otherwise of their predictions.

If they are so hot in the prediction department, why arent they cleaning up at Happy Valley.

I feel better now.

King Tubby

Anonymous said...

I cant see why people are not jumping onto this excellent op piece.

Re: China's worries about food security, here is an excellent and detailed discussion of the issue.


Gilman Grundy said...

@KT - I don't know if it's unreasonable for people to expect food production to keep up with population growth - after all, this has been the case for the last 200 years. Not unreasonable, but far from certain is how I would put it.

People who make long-term predictions are never going to be able to predict catastrophic change. That said, they are usually not so bad as things go. I recently re-read "The Rise and Fall of the Great Powers" by Paul Kennedy, a book written in 1987 which contained predictions for our present decade. Whilst the book failed to predict the collapse of the Soviet Union, it made it very clear indeed that the Soviet Union was in severe trouble and that some kind of rupture was likely. The book also failed to predict Japan's lost decade. In the case of China, however, the predictions were fairly accurate - though perhaps a bit over-optimistic in terms of the predicted growth figures. Predictions like these will never help clear up on the horse track, but they do give an idea of the more possible outcomes - they are like the odds given by the bookies (who do make a pretty penny from their predictions).

I do share your opinion of the SARS scare-mongers though.