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David Smith
The Sunday Times
The Boustead
Annual Globalisation
Lecture
The global financial crisis and
the changing world economy
The global economy’s shifting sands
After the upheaval
How did we get here and
where are we going?
A self-feeding cycle
Prolonged
growth
Excessive
lending
Rising
confidence
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
Japan’s GDP in 2015, America in the mid2030s.
 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 world’s
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.