While we bask in one of the fastest-growing economies in the world, there are emerging signals of fragility from enough sources to remind us not to take anything for granted.
Most spectacularly, an ongoing collapse in commodity prices suggests weak primary demand in a variety of countries. Top of the list of concerns is China, where growth is widely thought to be much weaker than the official target of 7 per cent. Actual growth could be as little as half of what the Chinese aim for and what the numbers suspiciously say they achieve, quarter after quarter.
The fall in commodities is not just about weak demand.
Energy prices have their own dynamic – supply and demand have their usual roles but politics and astonishing technological innovation also play a big part. The conventional explanation focuses on oil prices and the decision by Saudi Arabia, supposedly, to try and eliminate high-cost US shale oil and gas production. But commodities from milk to gold have also been falling.
And if the intention was to compete with the oil frackers, it hasn’t worked: innovation and cost control have led to utterly unexpected productivity gains.
Energy costs
By some estimates, fracking rigs in the US have scaled output by as much as 10 times over the last half-decade or so. We are used to better and cheaper computers and smartphones but the same forces of progress are driving down costs in energy production. Five years ago, it might have been true that Texan oil wells would have been decimated by $50 per barrel oil: today, many of them can still make money even with oil prices where they are.
A glance at cost curves for solar and wind energy tells a very similar story: extraordinary gains are being made. If these trends continue, a veritable energy revolution is happening right now.
Why are other commodity prices falling? There, a more traditional story can be told. Producers of copper and other metals overinvested in capacity when prices were high and demand has failed to keep up. Weak demand reflects the world economy, not just China. Slightly disappointing news about growth in Europe emerged last week: France has ground to a halt again, Finland is still contracting and even Germany seems to have slowed – maybe they aren’t exporting to China as much as they hoped. In the UK, unemployment has ticked up for a couple of months in a row: nothing to get alarmed about, but a warning, nonetheless.
Falling energy and other commodity costs are mostly good news: it’s a real income boost for countries, like Ireland, that have to import all of that stuff. But our own growth rebound has been hugely influenced by strong UK and US economies so we need to keep our fingers crossed.
Weak European growth is a familiar story. There, governments everywhere are following the policies advocated by John Bruton who argued last week, in this newspaper, that government finances should be likened to those of the ordinary household.
This couldn’t have been more wrong. We have known since the 1930s that what a government does with its budget is absolutely nothing like individual finances. When a household spends or saves, there are no broader economic consequences. A government can have positive or negative effects, sometimes huge, on an economy – with every fiscal decision it takes.
Vulnerable growth
The basic problem around much of the world is that everyone, governments especially, is trying to save. Until that stops, growth will remain both weak and fragile – susceptible to shocks.
Those lower energy costs are going to give scope to spend more but, already, the indications are that many of us are choosing to save rather than spend the extra income. It is precisely in these circumstances that governments can and should spend more.
Deficit fetishism, at a global level, is extremely silly, if not dangerous, during times such as these.
Sooner or later, spending has to rise. A big part of that story has to be capital spending – companies investing in themselves and governments spending on infrastructure.
That we choose not to do so leaves us vulnerable. In a European context, Ireland is small enough to warrant the household analogy (we have little choice). But Europe itself can and should spend.
