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.