Is The Financial Crisis Over? Not So Fast

Source : The Business Times, September 6, 2008

CERNOBBIO (Italy) - Oil prices are down, the dollar is up, and US growth and exports have perked up a little. So is the global financial crisis winding down anytime soon? Top economists and business leaders meeting on Friday at an Italian lakeside resort found plenty to discuss but little to agree on.

Peter Sutherland, chairman of British oil company BP Plc, predicted global economic conditions will remain difficult for some time - but will eventually recover due to growth in China and the rest of Asia.

Mr Sutherland, who is also chairman of London-based Goldman Sachs International, said equity markets would regain strength over time, but acknowledged it was impossible to tell exactly when that would occur.

'I expect a continued period of difficulty because of lower growth, higher inflation and credit markets - but like everything it will pass,' he told The Associated Press on the sidelines of the Ambrosetti Forum at the Villa d'Este on Italy's Lake Como.

Few were willing to make predictions on the record, but in private conversations there was a clear sense of optimism that by end of 2009 the bad debt traced largely to the US sub-prime crisis will have worked its way out of the system and that global financial markets will have stabilized.

Jim O'Neill, Goldman Sachs' head of global economic research, said he believes the credit crisis was largely a problem for the United States - as well as Britain and Spain - and that it amounted to an inevitable correction after years of debt-fuelled demand and deficit spending.

'If you're thinking truly globally, you have to think very differently from what we've been brought up on,' he told AP. 'The problem is very US-centric... It is conceivable that this is a structural shift and going forward the US will see a very different evolution in its growth.'

Mr O'Neill - widely credited with the fashionable acronym BRIC to signify the rapidly emerging Brazil, Russia, India and China - noted that those economies were performing well and the global economy was expected to grow at almost 4 per cent over the next year.

And with economies so interlocked, he argued, those countries should be accorded a more prominent place in global governance, regardless of concerns about democratic credentials - for example by including them in a rejiggered Group of Eight, which currently includes Russia but not the other three.

'If I believed that the Chinese consumer was about to collapse I would have a completely different view,' he added.

Others at the off-the-record conference expressed scepticism that Chinese consumers could take the place of the Americans anytime soon.

Another issue that occupied delegates was whether the recent rally in the US dollar was just a blip or a new trend that could trouble rising exports which have to date helped stave off recession.

The dollar has rallied more than 10 per cent against the euro and sterling in recent weeks, largely due to fears of an economic slowdown in Europe. Friday afternoon, the euro traded at US$1.4281 and the British pound was quoted at US$1.7673.

Delegates clashed over whether the current inflationary uptick in the United States and some European nations was a long-term threat.

Others voiced concern at what they see as a populist tendency toward protectionism emerging during the current US election campaign, particularly on the side of the Democrats.

Some argued that lower oil prices - crude oil has retreated from July's record high above US$147 a barrel to around US$106 now - and a bust in the commodity boom would have a deflationary effect.

But Jacob Frenkel, vice chairman of insurance and financial services giant American International Group, argued that with real interest rates - the central bank rate minus inflation - near negative territory in the US and other major economies, greater inflation was a major concern.

'If you look down the road another year or two it's very likely that you'll see higher interest rates,' he told AP - a development which, in the United States, might suppress already anaemic consumer spending as well as exports.

The annual gathering at Lake Como is the first since the credit crunch dried up money markets late last summer, leading to turbulence on other financial markets and putting major economies like the United States and several European countries, including Britain, on the path to recession.

Billed as a 'mini-Davos' after the annual conference held in Switzerland, the event is being attended by leaders including President Giorgio Napolitano of Italy, President Shimon Peres of Israel, European Commission president Jose Manuel Barroso and US Vice President Dick Cheney. -- AP