David Smith The Sunday Times

The Boustead Annual Globalisation Lecture The global financial crisis and the changing world economy

The global economys shifting sands

After the upheaval How did we get here and where are we going?

A self-feeding cycle Prolonged growth Rising confidence Excessive lending

The global economy looked unstoppable

The (brief) rise and fall of sub-prime

A leveraged buyout boom

The long credit boom

The rise of shadow banking

The financial sector lent to itself

… and to the rest of the economy

Housing boom and bust: Spain, UK, US, Japan

House of cards topples US house prices start to fall sharply, first big national fall since the depression. Subprime loans and securities start to look unsafe – not AAA but junk. Banks realise they are heading for huge losses and, importantly, so are other banks.

The biggest financial storm in a century

Extreme financial volatility (VIX)

Time heals – a long time since 2008

A dramatic response (central banks)

But the worst post-1945 world recession

The 1970s, 80s and 90s in context

A world trade collapse

And a rise in unemployment

Shrinking banking capacity

And very painful fiscal hangovers

… which will endure

Plenty of global green shoots

Global PMIs have recovered well

As world trade bounces back

Led by Asia

… globalisation threat averted

A more open world

A V-shaped recovery from the IMF

A fast-changing world

China and India were mighty before

Start of the great divergence

No double-dip with emerging economies strong

Not just an Asian story

But a recovery led by Asia

Barely a missed beat in China

Back to the future

But how quickly will it happen?

Where the growth will come from

Closing the per capita gap

China imports as well as exports

But global imbalances remain

A rising Asian middle class

Large reserve holdings

Closing the innovation gap?

Accelerating the global shift 2007: China was expected to overtake Japans GDP in 2015, America in the mid- 2030s. 2010: China has already overtaken Japan; will overtake America in the 2020s. Global crisis and its aftermath has accelerated the shift by 5-10 years. China, India and America will be the worlds big three: only one is flagging.

What could go wrong (short-term)? Credit Crunch II – refinancing and deleveraging by the banks. Sovereign debt – the euro zone and beyond. Currency wars – China versus America as the new heavyweight bout but also others. Protectionism – either provoked by or in addition to currency manipulation. Fiscal consolidation and the economic and political reaction to it. The unknown unknowns.

What could go wrong (long-term?) Politics – a backlash against capitalism; pressures for greater democracy; inequality. Growth momentum fades dramatically as the easy catch-up phase comes to an end. Globalisation goes into reverse, led by the actions of the advanced economies. Resource constraints.