'Rebalancing' nations will prevent global recession - Principal
GLOBAL - Though a global recession is unlikely, developed nations may experience a rebalancing of financial power, a US economist hassuggested.
Evidence already indicates some economies are being influenced by the improved positions of emerging markets regions, Robert Baur, managing director and global head of trading at Principal Global Investors, told IPE.
Baur warns pension funds need to stay diversified in terms of asset classes and regions as a result.
Though acknowledging this summer's turbulence linked to the credit crunch, financial markets still look healthy, according to Baur, along with other key factors which would usually reveal whether there are signs of recession.
Polls suggest consumers are worried economies are heading for recession, but Baur argues otherwise, arguing the market is not paying attention to the consensus of consumer opinion, or consensus has not taken notice of the true financial situation.
"How can we have a recession when unemployment is below 5% in the US, and where income is rising, nominal income climbing around 4-5% and in real terms 2.5%-3%?" said Baur.
"I don't know of a market where there has been a substantial recession without prior evidence in the market. It just doesn't look like a recession. If you have to have a reservation to get dinner, a hotel or a plane, there is no sign of a recession," he added.
That said, pressures of the trade deficit and weak dollar in nations such as the US, as well as banking write-downs and the need for cash at major financial institutions means the trade surplus wealth of emerging market nations will help to rebalance global financial structures to the advantage of all global economies.
In recent weeks, China and sovereign wealth funds from the Middle East have moved to invest outside their own regions and take advantage of potentially favourable returns, by injecting assets into financial firms desperate to improve their own liquid positions.
Most notably, there was a $11bn (€14bn) deal between UBS, the Singapore Investment Corporation and an unnamed Middle Eastern fund as well as this week's $5bn cash injection into Morgan Stanley by the Chinese Investment Corporation - a firm created to allow Chinese assets to be invested outside of its own borders.
With continuing globalisation, such rebalancing of financial power will create some "unknowns" within economies.
However, redistribution of wealth acquired through economic growth - such as that seen for emerging markets countries through the sale of goods and commodities - and slowing of economic growth in Westernised nations is likely to mean global inflationary pressures are more likely to be kept under control in 2008.
Moreover, "Chinese authorities are trying to limit any inflationary pressures, and have in recent months told banks they are not allowed to take on credit," said Baur.
"Opening the markets and allowing banks and funds to invest assets overseas means they are just trying to get some good returns on the money they have on reserve.
"Countries with trade surpluses have been investing in the US. There is a tremendous amount of liquidity in the market, as we have seen Abu Dhabi put $7.5bn into Citigroup - private equity and sovereign wealth funds are waiting to put money into strong cash cows of financial companies," he continued.
Other sectors are continuing to deal well this year - with energy up 20%, alongside utilities, healthcare, technology and industrials.
Baur predicts some rebalancing of positions between developed and emerging markets, thanks to the rise in living standards, as seen, for instance, in China.
"But I don't see this as an inflationary environment; there is a surplus of workers in pockets around the world. Inflation is what we have to keep under watch, particularly where a nation's consumer spending index is mostly made up of food, because food is now being used for much more than just eating," he continued.
Though developed economies show signs of a slowdown because of worries over the credit crunch and its impact on liquidity, Baur predicts as consumers continue spending, worries in the financial market are unlikely to trickle down the chain thanks to what he describes as "innovative moves" by central banks.
"They have focused on the real problem of liquidity, rather than doing what people wanted which was to lower interest rates," he commented.
Given the prospect of recession, Europe seems to be slowing, while the UK and the Bank of Canada has just lowered rates, and the European Central Bank has held at the same level.
"The high euro could be hurting some businesses in Europe, perhaps in Germany in particular, and it does appear emerging markets are seeing some impact. China is slowing, albeit from white hot to red hot as its economy is still booming," he said.
Eastern Europe is the most fragile of the emerging markets, as it has not have the trade surpluses that other regions have to help maintain the economy.
"With its strong currency, UK inflation should not be a problem and the Bank of England has plenty of space to lower interest rates if necessary," Baur added.