Slump began in US but others will lead revival
Industrial output in the world economy is now ahead of its peak of early 2008.
It passed that level back in July, and output in the world is by now solidly ahead. But I didn't know it until a few days ago and I have not seen this news reported in any of the main media. We are still worrying about the security of the recovery and realistically our GDP will not be back to its peak until some time in 2012.
Much the same goes for the rest of the developed world. So why the discrepancy? Is it just that our media focus on the half-empty view of the bottle rather than the half-full one? Or is it that the politicians want to blame the world economy, and of course the bankers, for their own economic mismanagement? Or is there something else happening?
It's a bit of the first two explanations. We tend to over-report bad news and under-report the good. But it’s not just that, nor the politicians' inevitable desire to praise themselves when things go right and blame others when they go wrong. The fundamental answer comes in two parts, one to do with globalisation, the other to do with the shift from manufacturing into services.
As far as the first is concerned, the basic point is that the industrial output of the developed world is still well below its previous peak, but the output of the emerging world is well past its peak. But who is this E7? The E7, the seven largest emerging economies, China, India, Brazil, Russia, Mexico, Indonesia and Turkey will, according to reports, pass the G7 in total output around 2019, though I can see this happening a year or two earlier.
But faster growth in the emerging world is only part of the answer. The other part is that these graphs are looking at industrial output rather than total output.The trend of the G7 has been pretty flat, whereas the trend of the E7 is shooting upwards. But the developed world did have some real growth during the past decade — it is just that the growth was concentrated in services rather than manufacturing.
You can see that in the Coalition's own spending plans. We don't have any details of the cuts, but we do know that health will be protected. So the Government is planning for the output of the health industry, a key service industry, to go on rising. It is also seeking to impose smaller cuts on another service industry, education. But it is cutting other spending on defence procurement. So it is saying that it wants to rebalance the economy
towards manufacturing and hence away from services. But what it is actually doing over the bits of the economy it most closely controls is quite the opposite. Um.
Several conclusions follow. The most obvious is that, viewed globally, not only is the world recovery reasonably secure, but it is at least as solid as it was in the second half of the 1970s. Next, the focus of industrial output has shifted rapidly as a result of the recession. Third, some shift away from manufacturing in the developed world is inevitable and we should not beat ourselves over the head about it. When the Government talks about rebalancing the economy, look at what the Coalition is doing, not what it is saying.
So what else should we be looking for in the coming weeks? The noise generated by the spending review is in danger of drowning out signals from the economy. In the next few months, look for signs of recovery not from the US, but from the rest of the world, in particular the E7. The recession was made in the US, the recovery is being made elsewhere.