The global economic outlook – we interview D & B’s UK chief economist

Yesterday, we featured  D&B’s Global Economic Outlook to 2018 - 2013 Year-End Update.   It has four headline findings.

  • The recovery from the 2008-09 recession remains the most challenging in the past century.
  • However, we are more optimistic about growth in 2014 and beyond, particularly in the U.S.
  • Headwinds remain in the form of potential policy errors related to quantitative easing tapering, the healing process in advanced economies, and imbalances in the emerging markets.
  • Austerity programs are also increasing political and social unrest.

It's a very interesting report, so I spoke to Warwick Knowles, D&B’s chief economist in the UK, to get into some of the key findings in more detail.

Warwick, thanks for talking to us. Whilst overall you are cautiously positive about the world economic outlook, your report clearly has some concerns about the stability of emerging markets. What is driving that concern?

The success of emerging markets over the last few years has been driven to a significant extent by quantitative easing (QE) in the major economies, particularly the USA. That has provided in effect cheap money, which could be used to fund investment in and provide liquidity for emerging markets.

Now QE is reducing in the US in particular, as that economy recovers. So the flow and availability of money also reduces, and therefore interest rates are going up in emerging markets in response. And currencies come under pressure as investors worry about the prospects of these countries.

I guess that’s basic  supply and demand when you think about it. The supply reduces, so the cost of money must rise. But which countries is this affecting?

Many of those developing and emerging market countries, including in Africa, Asia, and South America.   But Turkey is a good example. The lira has come under tremendous pressure and the central bank has overwritten the political will of the Prime Minister and pushed up interest rates – from 4.5% to 10% recently - to defend the currency.

But there are other countries at risk too. Our report evaluates countries – it is not a precise science but countries such as South Africa, Malaysia, India, Venezuela and Brazil look amongst the most vulnerable.

What does this mean for procurement and supply chain managers?

Well, for instance, currency weakening  means good news for Turkish exporters and buyers importing from Turkey. Turkish products should be cheaper on global markets, but of course it puts up the cost of imported goods to Turkey as well.  And there could be more pressure on businesses in the affected countries as the cost of borrowing increases - with the potential for cash flow issues, payment delays to suppliers, or even more bankruptcies.

And that may be exacerbated because many companies and individuals in emerging markets hold their debts in foreign currency - because dollars for example were available at low interest rates. But as their own currency weakens their debts increase in real terms.

That’s what brought down the Icelandic banks, a few years ago, wasn’t it? Borrowing huge amounts of money in foreign currencies at low rates?

Yes, that’s right.

Let’s hope we’re not going to see anything as dramatic as that this time!

Continued tomorrow...

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