US growth to pull us out of dark start to 2016

It has been a scary, foreboding start to the new year, with financial markets recording their worst January trading in living memory, worse even than the crash in 2000.

Wall Street has seen nothing like it since the Great Depression and the European markets recorded their worst week in years.

Precedents were set all over the place. The price of oil dropped below $35 per barrel after the two mightiest powers in the Middle East, Saudi Arabia and Iran, fell out, threatening the stability of the area. Shipping rates sank to new lows, commodity prices fell further and the emerging markets, battered and bleeding from the beating they have taken over the past year, fell again.

The South African rand led the way down, sinking below 16 to the US dollar and 24 to the British pound, about half of its level two years ago. The World Bank warned that if the Brics countries don’t pull themselves together this year, global growth could be jeopardised. “Downside risk predominates”, it concluded portentously.

What does it all mean? A market shake-out, or something much more serious? George Soros, known as the Man who broke the Bank of England because of his raid on sterling in 1992 when he personally made £1 billion (Dh5.35bn), thinks it is the latter.

According to Mr Soros, who has built a fortune of over $30bn by being right, the world is heading into another recession that could be every bit as bad as the one in 2008. Most of us feel we haven’t even clambered out of that recession yet, and quite a few countries definitely haven’t.

In Britain, George Osborne, who has presided over the most successful economy in Europe for the past five years, unexpectedly warned of the “dangerous cocktail” of global risks in the coming year which could wipe out the British recovery so painfully won this far after years of austerity. Both Mr Soros and Mr Osborne mentioned the combined threats of a slowdown in China, stock market turbulence that could spread to the real economy, the collapsing oil price and the tensions between Saudi Arabia and Iran.

Any one of these, if it gets out of control, is capable of plunging the world into crisis. But will they? The most pressing last week was China, which saw the panicked reaction by the Beijing authorities to stock market falls trigger more market chaos. New circuit breakers designed to calm markets had exactly the opposite effect. Last week the circuit breakers were on two days, with bizarre results.

Traders knew that if markets fell more than 5 per cent in a session, the mechanism would trigger, so on Thursday they unloaded stock in the hope of getting out while there was still time. The CSI 300 index of blue chip Chinese shares duly fell 5 per cent, and the markets promptly closed for 15 minutes. When they reopened, the sellers piled in again, taking the fall through 7 per cent, at which stage the market closed again. On that single day, the market was open for a grand total of 890 seconds, the shortest trading day on record since China’s stock markets opened in 1990. Overall, the Chinese markets dropped 10 per cent in a week, and the circuit breaker mechanism was suspended, hopefully never to be used again.

China’s economy, which has been the main engine of growth this past decade, is certainly stuttering, but it is not falling apart. Western economists, including the World Bank, last week revised their forecasts down below 7 per cent, which is well below the levels recorded for the past 25 years. But that is far from a disaster and certainly doesn’t merit the panic of last week. The crash had as much to do with the cack-handed way it was handled as to economic fundamentals.

The oil price may turn out to be rather more serious. As one economist said over the weekend, “the oil price is in danger of turning from helpful growth boost to damaging rout, which could set back energy investment for years”. In Britain’s North Sea, exploration has been cut right back, jobs are being slashed, operators are going bust and there is no relief in sight. In the US, Canada, Nigeria and most other oil-producing countries, new investment has slowed to a trickle.

Whatever the misgivings of Mr Soros, Mr Osborne and others in the gloom camp, the balanced view would suggest the world economy is still in recovery mode rather than re-entering recession. The World Bank, although it has just cut its forecast for 2016 growth from 3.3 per cent, is still projecting growth of 2.9 per cent this year and 3.1 per cent next year. On Friday the US announced that an extra 292,000 jobs had been created in December, well above expectations, and that the jobless rate had dropped to 5 per cent, which in effect means full employment. The US is still growing at a robust 2.5 per cent and the biggest indication that it will continue is the Fed’s decision to increase interest rates for the first time since 2008, with more to come this year.

While the biggest economy in the world keeps on growing, there can be no world recession. Mr Soros is wrong this time.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.

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