1 ‘Don’t blame China for global economic jitters’ (Ha-Joon Chang in The Guardian) The US stock market has just had the worst start to a year in its history. At the same time, European and Japanese stock markets have lost around 10% and 15% of their values respectively; the Chinese stock market has resumed its headlong dash downward; and the oil price has fallen to the lowest level in 12 years, reflecting (and anticipating) worldwide economic slowdown.
According to the dominant economic narrative of recent times, 2016 was the year when the world economy would recover fully from the 2008 crash. Those who put forward the narrative are now trying to blame China in advance for the coming economic woes. George Osborne has been at the forefront, warning this month of a “dangerous cocktail of new threats” in which the devaluation of the Chinese currency and the fall in oil prices (both in large part due to China’s economic slowdown) figured most prominently.
China is, of course, an important factor in the global economy. Only 2.5% of the world economy in 1978, on the eve of its economic reform, it now accounts for around 13%. However, its importance should not be exaggerated. As of 2014, the US (22.5%) the eurozone (17%) and Japan (7%) together accounted for nearly half of the world economy.
The truth is that there has never been a real recovery from the 2008 crisis in North America and western Europe. According to the IMF, at the end of 2015, inflation-adjusted income per head (in national currency) was lower than the pre-crisis peak in 11 out of 20 of those countries.
To make things worse, much of the recovery has been driven by asset market bubbles, blown up by the injection of cash into the financial market through quantitative easing. These asset bubbles have been most dramatic in the US and UK. They were already at an unprecedented level in 2013 and 2014, but scaled new heights in 2015.
Thus seen, the main causes of the current economic turmoil lie firmly in the rich nations – especially in the finance-driven US and UK. Having refused to fundamentally restructure their economies after 2008, the only way they could generate any sort of recovery was with another set of asset bubbles. Their governments and financial sectors talked up anaemic recovery as an impressive comeback, propagating the myth that huge bubbles are a measure of economic health.
We have wasted the past seven years propping up a bankrupt economic model. Before things get any worse, we need to replace it with one in which the financial sector is made less complex and more patient, investment in the real economy is encouraged by fiscal and technological incentives, and measures are brought in to reduce inequality so that demand can be maintained without creating more debts.
2 Oil firm Schlumberger cuts 10,000 jobs (BBC) Oilfield services giant Schlumberger has cut 10,000 jobs in the last three months amid the plunge in oil prices. News of the near-10% jobs cull came as the firm unveiled a net loss for the last three months of $1bn – its first quarterly loss in 12 years.
Revenues fell 39% to $7.74bn, with chief executive Paal Kibsgaard warning that there was “no signs” of an oil price recovery on the horizon. Schlumberger also announced a $10bn share buy-back programme. The profit figures were better than many analysts had expected, helped by heavy cuts to offset the slump in oil prices.
The latest jobs cuts added to the 20,000 redundancies the company had already announced earlier in 2015. Mr Kibsgaard warned that there were “no signs of pricing recovery in the short to medium term.”
The dramatic fall in prices “prompted customers to make further cuts to already significantly lower investment levels,” Schlumberger said, pointing to “unscheduled and abrupt activity cancellations.” Oil prices have dipped below $28 a barrel in a drawn-out slump since mid-2014.
Many analysts have slashed their 2016 oil price forecasts, with Morgan Stanley analysts saying that “oil in the $20s is possible.” Economists at the Royal Bank of Scotland say that oil could fall to $16, while Standard Chartered predicts that prices could hit just $10 a barrel.
3 Income, sales taxes proposed in Kuwait (Gulf News) Kuwait’s Emir Shaikh Sabah Al Ahmad Al Sabah has said that the country plans to cut heavy subsidies on fuel and power in a bid to offset a fall in oil revenues.
“We will lift subsidies and will raise the prices of petrol, electricity and water” and reduce subsidies for other services, a Kuwaiti daily quoted the Emir as telling editors of local newspapers. Kuwait is the only member of the six-nation Gulf Cooperation Council (GCC) that has not hiked the prices of petrol and power after income from oil plunged.
Saudi Arabia, the UAE, Qatar, Oman and Bahrain have either hiked or liberalised fuel and power prices, saving billions of dollars. In other steps to compensate for revenue lost from the plunge in oil prices to their lowest level since 2003, Kuwait’s Finance Minister Anas Al Saleh said the country should consider introducing income, corporate and sales taxes.
The Emir on Wednesday said that belt-tightening was in his country’s future when he urged parliament to cooperate with the government to pass laws to reduce the budget deficit. In Saudi Arabia, the Shura Council is considering proposals to revise the investment strategy of the kingdom’s social insurance fund in order to raise returns.