Economists’ judgments can be swayed by fads too, says John Plender
All but the youngest readers of this column will have been indoctrinated by economic pundits over a long period into thinking of Germany and Japan as the success stories of the world economy. Now we know better.
Last year, the Japanese economy shrank. It will be lucky to escape the same fate in 1999. As for Germany, it may not confront an immediate deflationary threat, but its performance has been notably soggy since the unification boom ran out of steam.
Eurosclerosis, a buzz-word of the 1980s, is beginning to be heard again. Germany, where low rates of interest produce scarcely a hint of entrepreneurial spark, is the sclerotic economy of Europe par excellence.
The obverse side of this coin is that the English-speaking economies have been the star performers of the past decade. The US, threatened in the 1980s by Japanese industrial might, has fought back. Growth continues to outstrip mainstream forecasts. Where Europe is alleged to be sclerotic, the US basks in the so-called new paradigm.
Generalisations are, of course, dangerous. At one extreme of the English-speaking world is Ireland, the tiger economy of Europe, which has grown over the past two years at 9%-plus – a rate that has rarely been seen outside Asia in its better days.
At the other extreme is New Zealand, where phenomenal success has been curtailed by the mishandling of the Asian crisis. Unlike Australia, which grew last year at close to 5%, New Zealand responded to the pressure on its currency in 1998 by more than doubling interest rates.
Devaluation
The Australian trick was a more graceful version of the British devaluation on parting company with the European exchange rate mechanism in 1992. Since then, British growth rates have looked positively dynamic compared with the big three economies – Germany, France and Italy – of continental Europe. And its unemployment rate is much lower than theirs.
The big question is how much of the Anglo-American success story is cyclical, how much a genuine uplift in the underlying growth potential? The US economist Paul Krugman argues that the improvement is structural and sustainable. In his (slightly tongue-in-cheek) view, people outside the English-speaking world have suffered from not being able to read Milton Friedman in the original.
More important, the global business language and the language of the Internet are English. Those like the Japanese that have non-alphabetic languages are at a particular disadvantage in the e-world. At the same time, many of the non-English speaking economies have been disadvantaged by heavy-handed, dirigiste bureaucracies.
Equally interesting is a suggestion of the new US Treasury Secretary, Larry Summers. He recently remarked that the successful economies are the ones that have diversified into innovative sectors such as information technology, biotechnology, the media and so forth. Services are increasingly important for both growth and employment.
Cyclical upturn
It is here that many of the non-English- speaking economies are at a real disadvantage. Japan, Germany and Italy – though not so much France – are seriously over-exposed to manufacturing. In a world where Koreans, Mexicans, Malaysians, Czechs and countless others have been taught how to manufacture very efficiently, and now enjoy the benefit of big devaluations, manufacturing is a bed of nails for those who did the teaching.
Of course, it is possible to exaggerate the misfortunes of the continental Europeans. They will have the benefit of a cyclical upturn this year and next. Many of the smaller European economies are doing exceptionally well. Norway comes second only to Ireland in the OECD growth league during the present decade.
Others, such as Austria, Denmark, Holland and Luxembourg, are doing well on growth and can match or better the UK on unemployment. And in southern Europe Spain, Portugal and Greece have the benefit of big catch-up gains.
So what does this mean for property investors? The moral is that the pundits’ judgments about economies tend to be faddish and short term. Remember how many economists were trumpeting the end of the US at the start of this decade?
Another punditry is that property is in the newly fashionable service sector. Yet property company shares are anything but fashionable. The problem, I guess, is that so many boardrooms in the property sector are really part of the leisure industry – not quite what people mean when they talk about the new paradigm.
