A new world order as US sinks.
HERE'S a big lesson of the first international financial crisis of the 21st century: some old-fashioned economies are weathering the storm better than those that borrowed big to spur growth or those that bet heavily on debt-strapped American consumers.
The US, the economy at the centre of the turmoil, is dragging down world growth. On Wednesday, Federal Reserve chairman Ben Bernanke gave his most pessimistic assessment to date of the US economy's outlook, strongly suggesting that a recession was likely.
In testimony before Congress, he also said the Fed projected slower global growth over the coming quarters.
How the other economies fare could offer important insight that world leaders already are trying to glean.
Over the coming week, the global economy will be at the centre of discussions as finance ministers gather for the spring meetings of the International Monetary Fund and World Bank in Washington. At the top of their agenda: what steps to take to revamp global financial regulation, ease the global credit squeeze and boost growth.
Countries such as Australia, Brazil, the United Arab Emirates and Qatar are still expanding smartly, although down from 2007, because they have rich veins of high-priced oil, iron ore, alumina or copper. Old-line heavy machinery makers such as Germany and Japan are riding out the problem because they have diversified their markets.
On the flipside, consumer-goods exporters of Asia that rode to prosperity by trading with the US - Thailand, the Philippines, Malaysia and even China - are seeing their lofty growth rates sag. And the Baltic countries, Hungary and Iceland, which borrowed heavily to finance growth, are now watched by international financial institutions to see whether they will come unhinged by the credit squeeze.
"The remarkable difference between this period of financial upheaval and those in the past is the performance of developed and developing countries," World Bank president Robert Zoellick said in a speech on Wednesday at the Centre for Global Development, a Washington think tank.
"Not only has the epicentre of the quake shifted (away from developing countries), but so far the tremors have shaken markets differently." Right now the global economy looks well positioned to weather the turmoil, unless the US falls into a deep, lingering recession. The global economy is expected to grow 3.8 per cent this year, compared with 4.7 per cent a year earlier, according to numbers due yesterday from The Peterson Institute for International Economics, a Washington think tank.
Resource-rich countries - including Russia, Brazil and Australia - are poised to keep prospering. Vast appetites for raw materials in China, India and elsewhere give commodity producers alternatives to the US market, and have lessened the chance of a commodities crash.
Russia, a centre of the last global financial crisis in the late 1990s, now touts its economy as a "safe harbour" thanks to surging prices for its oil, gas and other commodity exports. Brazil, another late 90s loser, has become a new economic pillar thanks to soaring demand for iron ore, coffee and sugar.
Brazil's interest rates are heading downward after years in the stratosphere, giving Brazilians relatively cheap credit which they're ploughing into new homes, cars and small businesses.
"So far, Main Street Brazil is untouched by the crisis," says Luis Largman, the chief financial officer of Cyrela Brazil Realty, a Sao Paulo-based home builder. Last July, just as the sub-prime crisis was beginning, his company scrapped plans for a bond sale meant for US investors. It instead raised the funds, about $US285 million, among Brazilian investors at nearly the same cost. The company is now posting record sales.
For some commodity producers, the biggest danger is overheating. Middle Eastern oil producers are sinking their new wealth into government-financed roads, airports and new oil and gas field development. But the spending is stoking inflation. That is exacerbated by a sharply falling US dollar, which raises the price of imports in Persian Gulf nations.
In Qatar, inflation is running at 14 per cent. In the UAE, inflation has triggered a series of violent protests by expatriate labourers angered by their falling buying power. In response, some governments in the region are lifting Customs duties on construction materials and food imports, and boosting government salaries by as much as 70 per cent.
A number of world economies might be in for pain, including Turkey and the parts of Eastern and Central Europe that have borrowed heavily on global markets to finance spending on consumer goods and real estate. The likes of Romania, Bulgaria, Hungary and the Baltic trio of Latvia, Lithuania and Estonia could now face a drying up of credit. That raises the risk of a replay of the 90s financial crisis, when Latin America, Russia and Southeast Asia couldn't repay their foreign currency debts, causing banks and companies to fail and plunging economies into recessions.
Sparsely populated Iceland is among the newly vulnerable countries. At the end of last year, its foreign debts, held mainly by banks, amounted to 430 per cent of its gross domestic product, several times the level in the countries of Eastern Europe.
The global credit crunch means Iceland's banks must pay higher interest now to borrow funds abroad, which they then lend at home. In response, local companies and households are curtailing their borrowing and spending.
Iceland's policy makers counter that the country's banks have ample funds to service their debts and that recent investments in aluminium smelting will spur export revenues.
Still, Iceland's currency, the krona, is under heavy pressure. The cost of buying insurance for debts owned by Icelandic banks has reached the highest level of any country's lenders. That usually means investors believe a debt default is a strong possibility.
Asian consumer goods exporters also face a slowdown because their economies' fortunes are tied so tightly to US consumer spending, which has been slowed. A repeat of the 1990s crash in the region is unlikely, though, because Asian nations have built large cash reserves and current account surpluses, which they could use to pay off foreign debts.
In the 1980s and 90s, Thailand lifted itself from poverty by attracting foreign companies to build cameras, televisions and refrigerators there and then sell them to US consumers. Over the past few years, Thailand's exporters have been trying to wean themselves from dependence on US shoppers. It isn't easy. Exporters in China, Vietnam, Malaysia and elsewhere in Asia are trying the same thing, deepening competition. Plus, the patterns of global trade are so complex that it's not easy to steer products to a particular destination.
European consumer goods companies are also feeling the pinch. Emerging economies churn out their own simple products more cheaply, while a declining US dollar has made Italian clothes, French wine and German cars more expensive for Americans.
Exports account for about 70 per cent of the sales of bicycle-maker Look Cycle International, based in Burgundy, France, and the US is one of its biggest markets. Late last year, Look cut the euro prices it charged its US unit for importing bicycles by 15 per cent, so its bikes' prices wouldn't soar in US shops. That cut into its own profits, Look says.
Now that a dollar is worth barely 63 euro cents, Look doesn't bother to swap its US revenues for euros. Instead, it keeps the dollars in a bank account and hopes the dollar will strengthen.
European nations that are big exporters of capital goods - the heavy tools and machinery used in manufacturing - are faring better. Companies in Germany, Switzerland and parts of Italy have so far managed to blunt the effects of the rising euro by diversifying away from the US market. Unlike their consumer goods counterparts, these manufacturers are still able to rely on sales to emerging economies. Machinery sales also depend on quality of engineering, where some European companies may be perceived to have an edge.
Industrial goods makers in Japan also say they are coping with the US downturn. When the US economy last tanked in 2001, machine-tool maker Mori Seiki, in Nagoya, Japan, showed a loss for the first time in years. But it has since diversified its customers and this time it expects to turn a profit, says its president, Masahiko Mori.
About 25 per cent of Mori's worldwide sales are to the auto industry, which have already been affected by a downturn in US consumer spending. But Mr Mori thinks demand from other countries will make up for this. "Of course the US market is still important," he says. "But our increase of business from BRICs (Brazil, Russia, India and China) and Europe means we've diversified our risk."