by Chris Furness, Global Head, Cash Management and Alex Barrett, Head of Client Research, Standard Chartered Bank
Following a decade and half of generally strong growth and benign economic conditions, the world is in the midst of a very serious financial crisis resulting in weaker global economic growth. The epicenter of this turmoil is the US and in particular the US consumer but the ripples have spread out around the world. However, the effects are not uniform: there are great differences in the fortunes of companies, markets and economies and this has profound implications for both cash management and overall working capital management.
The over-abundance of credit and the low inflation resulting from the introduction of India and China, in particular, into the world economy led to enormous imbalances. Indeed, the 11% or higher current account surplus is likely the biggest the world has ever seen and certainly the accumulated foreign reserves are unprecedented. The over abundance of credit led to booms in asset prices, with the final (perhaps?) boom being the US housing market. The unwinding of that bubble is leaving exposed over-indebted US consumers who will have to rebuild their collective balance sheet. This will leave the US with sluggish growth for several years.
For much of the developing world, though, growth remains robust in stark difference to previous cycles. The challenge here is inflation, especially of food and energy prices. The balance of the world’s economic power is shifting from the ‘West’ (or developed world) to the ‘East’ (or developing world). Economic growth in China is likely to slow from 11.5% in 2007 to 9.5% in 2008, India is likely to slow this year but accelerate next year, and Nigeria looks like growing more strongly in 2008 than in 2007. These economies are developing their own internal dynamics and are increasingly linked directly rather than to the US. The US is no longer China’s biggest trade partner. Trade between Africa and China has grown at more than 40% per annum for the last six years. They will be affected by the US slowdown but it will not be catastrophic.
As these economies grow they are increasingly consuming more resources, especially food and energy, so commodity prices have stayed high. To take oil as an example, 40% of the growth in consumption this year will come from China and India and 30% from the Gulf. Prices are rising because supply just cannot come on line quick enough after years of underinvestment.