2013 – Just another New Year?

In recent years, I have used my January column to try to make some sense of the year that has just passed and to posit some suggestions – which of course stop short of being precise predictions that I may have cause to regret – for the 12 months ahead.

So where are we now? Demand throughout the economy is sluggish because the banks are not lending nearly enough; property prices in many European countries remain in the doldrums and the euro is in crisis. Hang on, that’s pretty much what I wrote in January 2012 … and 2011 … and 2010. Well you get the picture. The reality is that five years into the downturn or crisis, not much seems to have changed.

In trying to make sense of the present economic situation, I thought it best to focus on areas that impact our lives here in Gibraltar. I have concentrated on growth rates in world economies and the continuing upheaval in Europe – especially how it impacts on the euro zone and the currency itself, the oft-criticised euro. And, as this is a finance column, you may be glad that it will not be another review of the Diamond Jubilee and the London Olympics. True, Gibraltar got into the spirit with our giant posters of HM The Queen – and even a re-painted post box – but the jury is still out on their economic impact.

On the financial markets, 2012 saw pitifully low or negative growth rates in many of the developed economies, particularly in Europe where virtually the whole continent remained in recession during 2012. However there were some notable exceptions elsewhere. As I reported in a pair of back-to-back articles – on the BRIC countries (Brazil, Russia, India and China) and Africa – annual GDP growth levels in some places are still 5% or more. All countries in Arica reported positive GDP growth for 2012, so in hindsight perhaps it was indeed rash for the Spanish prime minister to state “Spain is not Uganda”. One can understand that this caused some consternation in Kampala – at least judging by the scathing riposte that followed – particularly as its annual GDP growth rate is 5.2%. Uganda that is, not Spain!

In Europe, low or negative growth combined with reined-in government expenditure and hikes in personal taxation have led to a swathe of “austerity” budgets being announced during the year. And the people don’t like it. Several heads of governments paid the price at the ballot box – although Barack Obama bucked the trend and was re-elected by what turned out to be a surprisingly healthy margin.

Turning to the euro itself, the currency proved surprisingly resilient to external market forces during most of 2012. Across the EU bloc, difficulties continued to mount as the year went on. The 17 nations that use the euro are bound together in the unforgiving, inflexible straitjacket that is required for membership. They have learned the hard way that old fashioned economics simply don’t work when you are battling with a common currency that is not backed by a greater degree of fiscal, still less political, union. Such arrangements have generally not worked in recent history.

Any student of economic theory will know that the best way to deal with soaring debt and low demand leading to negative growth is to simply devalue your currency, manage interest rates whilst controlling inflation and allow the market to take care of its own recovery. True, the local burghers don’t care to see their assets shrunk but the strategy can be very effective. Consider the impressive progress Iceland has made since its near complete and unprecedented economic collapse in 2008.
But countries such as Spain, Portugal or Greece simply don’t have this option for as long as they remain part of the euro bloc. Faced with an over-valued currency and interest rates at historically low levels, they have very little room for manoeuvre. Hence the focus on austerity – lower government spending and higher taxes – which has caused so much unrest. In Germany, the opposite applies as German industry finds it increasingly difficult to sell high value manufactured goods abroad.
I recently read the most thought provoking analysis on the euro crisis written by a man who should know – George Soros, the man who famously netted a billion when sterling fell out of the ill-fated ERM mechanism in 1992. He advocates a simple choice for sorting out the mess. Either Germany must become a “benevolent hegemon” – which is another way of saying that she must support the other countries as they battle to make the books balance – or, and this is the fascinating part, that Germany itself should consider exiting the euro zone. I very much doubt we will see that in the next year but some serious re-arrangement of what was considered an inviolable currency union may become inevitable.

All of this affects us in Gibraltar given our geographical position and reliance on tourists from Spain and other euro zone states. Anyone importing goods from the EU into Gibraltar will be similarly affected by any changes in the currency’s value so this will certainly be something to watch in 2013.
Not that the effects make themselves felt only within the euro zone countries. I have written many times about the effect on the UK but 2012 was also a difficult one for Switzerland, itself one of the wealthiest countries in the world. Investors around the world piled into the Swiss franc, which resulted in an unsustainable rise in its value against other currencies. Anyone who has visited Switzerland recently will know that an already expensive country has in recent years become even less affordable. The Swiss government responded by pegging the Swiss franc against the euro in an attempt to protect its economy – at huge financial cost.

So let’s finish closer to home in Gibraltar as we turn the year. Some of my retailer friends with shops in Main Street tell me that 2012 may have seen more tourists than ever before, largely as a result of the higher number of cruise ship visits – on occasion three ships visited on the same day – but question whether this has actually increased total spending. Austerity affects the mind-set of everyone, including the well-heeled.

For others in Gibraltar, the global downturn continues to mean serious hardship in some sectors but new opportunities are also emerging. In my case, I am confident that Gibraltar’s attractiveness as a pension (QROPS) jurisdiction should result in further growth in that area. This should lead to new employment. One could cite several other examples including insurance, funds and the like and future columns in the Gibraltar Magazine will deal with these exciting areas.

So what will happen in 2013? If I could predict the future, I probably wouldn’t be here running a trust company and writing articles for you to enjoy, dear reader. Don’t get me wrong, I enjoy the work – although the idea of simply lazing on a beach somewhere hot at this time of year does have a certain appeal. But, without putting my career on the line, there are some finance-related matters that I feel relatively safe predicting for the 12 months ahead

Demand throughout the economy will be sluggish because the banks are not lending nearly enough; property prices in many European countries will remain in the doldrums and the euro will be in crisis. Oh dear, that’s how I started this piece. Let’s see how true these comments remain at the turn of 2014. And one last prediction - Chelsea will get another new manager!

For me, leaving 2012 at least means I can move on from the significantieth birthday that befell me last June. Let’s hope that 2013 will see some improvement in the overall global economic position and that any green shoots we are seeing are allowed to flourish and develop.

I wish you and your loved ones a very happy, prosperous new year 2013 from all of us at Sovereign

Bric & Back

Anyone who knows me will tell you that I have eclectic tastes when it comes to travel. It has always been a passion of mine, and stems from the encouragement given by my parents back to when I was in short trousers. No matter how hard the times – and we’re going back to the early 1970’s here – a holiday was always on the agenda.

It might have been a camping trip in Brittany, just 30 miles from our home in Jersey, but it was abroad. We were taken everywhere and encouraged to speak the language, eat the food and interact with the locals. No namby-pambiness allowed in our household. You want to try an oyster? There’s a franc, go and ask the fisherman on the slipway. Imagine being allowed to do that now! Nevertheless, the training served me well and all these years later I have visited over 100 countries in total.

So in order to celebrate the significant birthday that has just befallen me, we were fortunate enough to spend a week in one of the most exciting, vibrant (and exhausting!) cities in the world – Hong Kong. It wasn’t my first visit but I saw more of the place this time than ever before and we met several friends who now live and work there. One of them goaded me. “So you’re planning to stay in Gibraltar, then, are you?” he said. “Are you sure Europe is really for you? I mean the old world’s finished really isn’t it? This is where you want to be. It’s all about BRIC countries now, well BRICS actually”.

The last point got me thinking. Europe is on its knees – and I imagine will be so for some considerable time. But are people in the so-called BRIC countries really so much better off than we are here in Europe? Are they so economically superior that we should all simply up sticks and emigrate. To borrow The Sun newspaper’s famous headline from Election Day 1992, “will the last person to leave please turn out the lights”.

Let’s pause for a moment to consider what BRIC (or BRICS) stands for and why the four countries concerned are grouped together in this way? It was the economist Jim O’Neill, chairman of Goldman Sachs Asset Management, who originally coined the term BRIC in 2001. Standing for Brazil, Russia, India and China, the acronym is used to describe the shift in global power and influence away from the old world economies – chiefly the G7 countries – toward the developing world. Some economists estimate that BRIC as a group will overtake G7 in less than 15 years. So what is that final capital “S” all about?

I should say at this point that my Hong Kong-based friend was born in Jo’burg so perhaps it should not come as too much of a surprise that the “S” stands for South Africa. Economists at a Reuters’ summit two years ago decided against BRICS – Jim O’Neill himself said South Africa’s economy was simply not large enough to be included – but, despite this, the political association formed by the four BRIC countries in 2008 invited South Africa to join them in 2010. So BRICS does now exist as a real body representing almost three billion people (some 40% of the world’s population) and 25% of the world’s land surface. But let’s return to the original four BRIC nations.

The idea then is that these massive economies are showing the Old World the way forward, right? Well maybe – but surprisingly perhaps, it’s not all unadulterated good news. Despite the undoubted influence that BRIC now exerts over the rest of the world, all four countries rely on exports and these have been falling due to the their exposure to markets in the “Old World”, the eurozone in particular. Put simply, we are no longer buying as many of their goods. For example some 30% of total BRIC exports are to EU countries; in the case of Russia (which relies heavily on fuel exports) this figure is closer to 50%. Clearly then the on-going European financial crisis continues to exert a negative effect on these BRIC countries and indeed elsewhere.

At the same time, the BRIC countries are experiencing a reduction in domestic demand that is in large measure due to stubbornly high inflation rates. When combined with rising interest rates, it is not surprising that their economies have slowed as a result. In order to stimulate demand, interest rates have been cut in Brazil and more recently in China. The hope is that this should translate into healthier domestic figures during the second half of 2012 and into next year.

The stark contrast between the “Old” and “New” worlds is perhaps best illustrated in terms of my favourite statistic – Gross Domestic Product or GDP. Regular readers may recall that GDP is defined as the market value of goods and services produced in a country over any given period. Normally expressed quarterly as a percentage increase on the previous three months’ numbers, a positive figure indicates a country’s growth rate whilst a negative figure indicates a decline. Two successive quarters of negative numbers is deemed to be a recession. This is the unfortunate position in which the UK and several other European countries now find themselves and, of course, a shrinking economy makes it even harder to turn things around again.

Contrast the gloomy European position with that in the BRIC states. Leading business commentators focussed on the fall in the Chinese growth rate for the first quarter of this year. At 8.1% it was the slowest growth rate in three years. In India, which posted a “mere” 5.3%, one has to go back to 2003 to find such a “low” growth rate. Although not of the same magnitude, strong positive growth rates of 5% and 3.5% are also forecast for 2012 in Russia and Brazil, so one can understand why inflation – always the scourge of booming economies – is such a real concern.

So let us return to my South African friend’s advice that I should be moving to live somewhere in the BRIC(S) bloc. As I have written many times previously, although Gibraltar has been able to insulate itself from the worst effects of the crisis the economic outlook is not exactly rosy in our region – and no doubt there is more pain to come. So as I returned home to Gibraltar from the other side of the globe was I tempted to head straight back?

Perhaps, if I were 20 years younger, I mused. But then as I stared up at our Rock of Gibraltar , I knew immediately where I’d prefer to be. BRIC or even BRICS might represent the new exciting global financial order but I am a passionate supporter of Gibraltar so give me my little corner of the Mediterranean anytime.

None of this is meant to minimise Europe’s problems but it’s disingenuous to write the continent off entirely. We can’t all live in new uber cool cities such as Hong Kong, – or come to that Shanghai, Delhi, Sao Paulo or Moscow – although many of my colleagues at Sovereign choose to do so and it’s often part of my job to persuade – or encourage – yet another to make such a move. Of course, BRIC countries are great to visit (and I have been to them all) but the Rock, and all it has to offer, suits me very well indeed, thank you very much. Not everyone has such a choice of course but I know many people living in this region who think as I do and wouldn’t change it for the world – no matter how much greener the grass might seem to be.