So it looks as though it’s going to be a lower, slower world – but hopefully still a growing one. This should not come as any surprise when you look around most of the developed economies, as it is quite hard to identify exactly where the demand for growth is going to come from. Yes, the developing nations will continue to develop but they too will be affected as the demand from the developed nations is likely to be generally weaker. As we can read from researches of Reinhart & Rogoff in their book ‘It’s different this time’, economic recoveries after financial and banking crises tend to be far more protracted than the more ‘usual’ economic recession.

After a decade of economic feast, if not an actual ‘boom’ (and I remember calling it that even then), in almost biblical symmetry are we not likely therefore to have ten years of lean – of which we have already had some three years? The thing about a boom is that you can’t really see it until it goes bust. However, there were indicators that certainly pointed to it but few wanted to take any notice of it. Personal borrowing levels in the UK reaching over 100% of UK GDP - and even beating the US consumers on debt levels was one such measure. 125% mortgages were another and buy-to-let property schemes based on credit cards were evidence as well.

So can we now search for the next indicators to see if they can provide us with any insight into the future? The main indication really seems to come from the banking sector. A combination of increased capital constraints, less capacity (fewer banks especially from overseas) and high levels of risk aversion, all mean that the volume of bank lending is likely to be less easily available compared with the boom we saw before. Despite the somewhat illusory impacts of the much hyped Project Merlin, there are signs that levels of lending are picking up, but the question of the breadth of the margins being asked for is still a very sensitive issue.

I think, though, the main indicators will be those of consumer and business confidence, as it will be the state of mind of those bodies that will really be the guide for any recovery. The Prime Minister was quite right to ask for a measure of ‘well being’ and although it will be dependent on the style and type of questions being asked, it could provide a very useful indicator of the country’s attitude. Without sufficient levels of confidence, consumers spend less and companies are reluctant to invest more.
However, much of this will be influenced by the style of political leadership itself – if our leaders continue to wallow in a depressing mire of talk of austerity then it will become a self-fulfilling sentiment. If on the other hand there is a greater focus on the positive developments of a slowly recovering economy, with improved business conditions allied to a gradual rising in personal living standards, then attitudes will change. This is as much a communication issue as a political one.

Questioning a ‘certainty’

China has become a totem for economic and financial success. The popular press laud the demand for just about everything in China - the air of Chinese opium has attracted many with a sweet scented smell alluring potential investment addicts. However, when there is such an apparent unanimity of view then there is every reason to question the ‘given’ view and to prick the bubbles of complacency and possibly prepare for some cold turkey.

There are various issues which seem to have been, if not ignored, then at least not recognised for their importance. These can include the concerns about property ownership, in a country without any standardised property code, and a banking system where the regulation is seen to be at least opaque and which some have even described as ‘Ponzi-like’, where the Chinese government, aka the Chinese Communist Party, often regard state owned banks not as independent commercial enterprises but as extensions of party policies and instruments of national control. I am sure some cynics might say that the UK government’s investments in both RBS and Lloyds could be similar in terms of fulfilling government policy, but few would say that they had any direct control. The key difference though is that of transparency – we may not trust our banks as much as we did but I suspect we have a greater level of confidence in their reporting and regulation than their Chinese counterparts. Perhaps we can take some comfort from the revelation that China’s National Audit Office disclosed that 17 state owned companies have misreported their financial data, or perhaps be more worried that financial integrity seems to be at somewhat of a premium there.

There were also some interesting statistics about China from GMO in Boston that highlight the level of importance that this nation has on key commodities. China, as the world’s second largest economy and generating 9.4% of the world’s GDP, now buys 53.2% of the world’s cement, 47.7% of its iron ore, 46.9% of its coal, 45.4% of its steel - and the list goes on. When it comes to foodstuffs it buys 46.4% of the world’s pork, 37.2% of its eggs and 28.1% of its rice. These I think are astonishing numbers and highlight just what potential risks there are to China’s trading partners if China’s growth were to significantly slow and the backwash effect on those with an increasing reliance on such trade.

One such country that is intrinsically linked to the fortunes of China is Australia. Apparently 25.3% of their exports go to China directly, but if you take into account the amount they export to the other key exporters to China, then this figure increases significantly. 18.9% of Australia’s exports go to Japan, and 8.8% to South Korea – thus Australia seems well and truly dependent on China. The impression also is that with all these exports, Australia must be running a huge trade surplus, but in fact the country ran deficits for some 77% of the quarters since the year 2000. What has happened though is that the Australian $ has been at record highs, thus attracting cheap imports and pricing out their exports - especially in valuable areas like their wine industry.

Britain in our imperial days may have been responsible for the export of opium to China in the 19th century, and in fact fighting two awful ‘opium wars’ for trade rights, but now it seems that the Chinese are exporting a form of financial opium and sadly it seems that it is the Australians that are suffering from this addiction. From experience, can I suggest action is taken earlier rather than later? Dependence is not independence.

And finally..............When the U.S. Navy SEALs - the SEa, Air and Land special forces - captured Osama bin Laden, it was not unsurprisingly big news around the world. In Germany, the news network N24 put up a logo of SEAL Team 6, which had credit for the operation whilst the raid was described. Unfortunately, the logo shown was for the ‘Maquis Special Operations - SEALS Team VI’ - from Star Trek - not the U.S. Navy SEALs Team 6.

The Maquis is a fictional rebel group in the 24th century ‘Star Trek’ universe, named after the World War II French Resistance fighters; the logo was created by a Star Trek fan club, and the Team 6 members are Klingons.

"They don't have the skull in their emblem for nothing” said the somewhat naive German television presenter about the logo. He didn't seem to notice that the skull was extra large (because it's a Klingon's), or that the skull's eye patch is attached with bolts. Another give-away might have been that the weapon in the logo is a Captain Kirk style ‘phaser’, as yet not being used by even the US Special Forces.

Please, nobody tell Sarah Palin as she will only assume that Osama was a Klingon.

Have a good week.

Justin A. Urquhart Stewart Director Seven Investment Management Limited