Neville Bennett doubts the world is developing a two-speed economy. He sees one slow speed. Your view?

By Neville Bennett

Most authorities, like the IMF, have picked robust economic growth for this year.

But there are increasing signs that the forecasts are too optimistic.

Not all the evidence is in, but we now know enough to say that global growth slowed in the June quarter. This long soft patch runs contrary to generally accepted opinion. Rising food and energy costs have depressed spending even in rich countries.

QE hoodwinked people.

It drove up assets and commodities prices but people could afford to buy less, so consumption is very low.

Moreover, capital investment is low as business sees little reason to invest in new plant. This lack of demand has intensified the Euro crisis as the PIIGS are unable to expand their economies.

It is usually assumed that the emerging economies, especially the BRICs, are driving the world economy. The IMF talks about a two speed economy, a stagnant West and surging East. I have a suspicion - which is hard to prove due to data lags - that it could be a one-speed economy.

A slowing in emerging markets is not implausible as they depend on finding the final market in the West for many of their products and services. So if the West’s market goes quiet, it pulls in fewer emerging market products (e.g. toys and call centres).

It appears that Asian export volumes started to stagnate in October, the Brazilian economy slowed, and Australia has slowed. The Japanese and UK economies are slayed by debt. EU production peaked last December.

Retail sales in the rich G7 counties - who consume a lot of emerging market final production - have been stagnant for 6 months, with an inclination to fall off in the last few weeks. If we take out US retail, most rich countries have been really flat for 6 months. It seems stimulus came to an end, and sales are still 3-4% below 2007.

I propose to look at several indicators to see if there is a pattern. I prefer to use primary sources for these rather than relying on media commentary.

My Indicators

1. Baltic Dry Index

This is the index of shipping demand. It cast light on goods being shipped and the price of sea freight. The Index fell 4% in June, 22% yoy.

2. IATA (International AviationTransport Agency)

Passenger traffic had a poor Q1, but was strong in May (last data available). Economy travel is up 5.5% yoy. Premium travel is up 9% yoy, but slowing to 3-4% this year. The Atlantic is up 12% (tourists going to USA?) but Asia has weak growth of 4% p.a., partly reflecting Japan's tsunami.

IATA believes business confidence "has been deteriorating steadily", and is now at levels last seen in 2008 when premium travel was growing slowly, and "we may well see a slowdown".

Turning to Cargo (remember that one third of goods go by air freight) IATA says markets have deteriorated significantly and economic growth is slowing. But IATA is not alarmed, expecting growth to be good. However, air freight "peaked in Q2 2010. Since then volumes have declined ... Atlantic markets have picked up, within Asia is down."

3. Oil

Demand for oil has slackened in comparison to 2010, prices are trending lower despite the loss of Libyan production. Slow growth in the US is regarded as significant in taking the heat off. Prices are trending lower.

Exact statistics on supply and demand are hard to access without a subscription to the International Energy Agency. Opec is supplying 31.3 million barrels per day at present, and the IEA thinks 29.8 to 31.4 mbpd will suffice through 2012. This seems rather stagnant.

4. The US 2-year bond

This is another indicator which I value because the bond market reflects a vast pool of capital, with sophisticated investors. (The global bond markets are more than twice the size of global stock markets, although exact and up-to-date data is elusive.)

The 2-year is yielding 0.36%, and this reflects the market expectations that the Fed will not be tightening over the next two years. These expectations are reinforced by a perception that the economy will be weak for a long time, forcing the Fed to be super-accommodative. Weak growth and low yields go hand in hand.

6. Commodity prices

A booming economy tends to stimulate price as customers compete for supply. Prices in most commodities have weakened in the last month.

I use S&P indices in my reports. These indicate that Q1 in 2011 was a boom but Q2 is a swoon.

S&P’s energy index is down 7.8% for Q2, its Agricultures Index lost 12%. Industrial metals were down 0.8% for the half year. Corn has recently traded at a higher level than wheat, and this tends to lead to falls for both in historical experience.

Softs were quite strong because of sugar and cocoa, but cotton has fallen steeply.

Livestock was the only index to rise in June due to US exports. US farmers sold livestock as feed costs rose and domestic demand fell.

7. The US economy

The US is important as the largest single market. Forecasts for the year were growth of about 4%, but 2.8% was achieved.

It is struggling to maintain that slow rate.

The US housing market has now fallen more than it did in the 1930’s and I think the bottom is not yet in (I follow Professor Shiller).

There appears to be a jobless recovery as unemployment is rising. Only 18,000 jobs were added in June, nominal wages fell, and unemployment grew. Average hours worked fell.

I look at the participation rate, which is the proportion of the working age population with a job. In June it reached its lowest level of 58.2% (it was over 63% in 2007). Wages are low, and real wages have fallen for most people for decades.

Almost 45 million Americans (approximately 1 in seven) are on food stamps and the Department of Agriculture reckons only two-thirds of the eligible have signed up. Medicaid, America’s health care for the poor does not apply to childless adults in most states.

Consumer sales were up only 0.1% in June, which is really negative as inflation has picked up. The American consumer is cautious, and this is important for growth as consumption is responsible for 70% of GDP. Manufacturing is also slowing.

8. China

I tend to be bullish about China but acknowledge its high inflation, its over-supply of housing and the fragility of its banks.

But it is having difficulty in selling its exports as world demand cools. It has its first trade deficit this year and exporters find margins very slim as import and labour costs have escalated. The volume of exports has a much slower growth rate than their value. And, overnight, the Chinese PMI slipped into contraction levels. Readers might like to browse this official site for the Chinese economy.


I could write much more, but the indicators presented above suggest a slowing world economy. 


* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR.

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Fabulous wall of BS emerging from the grand meeting to solve the debt problem of the piigs and the euro problem on the trust and oh not to forget the ratings agencies being rotten buggers and finally telling the truth.

Greece has defaulted but the term 'default' has been eurofied to not be default because they say so.....bullshit.

If you were dumb enough to own greek IOUs, you won't get your money back for 40 years and then only if you're lucky..oh and the interest rate you will be paid will be what they say it will be...QED a default.

So will this encourage you to buy IOUs in any of the other piigs.......Portugal..Ireland..Italy..Spain...oh the pain...haha

Sounds right. So the funds manager that buy debt will buy....safer debt...New Zealand debt (?)....before its yield, disappears.

It's known as the BBB Strategy....Bigger Better Bullshit

Pssssst wanna know about the Fiscal crisis in the plain English!

Have to agree Neville.. Can't see how China and India can grow when they have been so reliant on the frivolous overspending of the western world..

This then effects our commodities.. and so on...

Seems incredulous that anyone could think we are not one global enconomy...

too right

any economist who can't see the global interconnected linkages is a moron

that applies to most NZ economists

Thanks Neville for your numbers based analysis.  I worry about the long term effect of us retiring baby boomers.  We will spend a lot less which will further depress world ecconomies.  I guesse that our propensity for speculation will diminish, that will be good and help restore a more sound ecconomic mind set.  It is going to be a long hard grind and I think that the mess that we have left future generations should be a source of considerable shame for some people, but I doubt that they give a toss.

Where are the areas of hope.  Building the living standards of the second and third world?

Teaching the second and third world to become consumption based enconomies maybe not such a good idea... A World War on the other hand!!!'re supposed to be out working to pay the interest on your mortgage....go on...get to work....

Geece in default.

 "Given that nothing has been solved, the climax of this saga has still not yet been seen. The deal still requires every member nation to approve changes to the Maastricht Treaty, which may not happen. Moreover, Greece is just the first of many nations to test the system. Ireland, Portugal, Spain, and Italy are waiting on deck. Finally, will German taxpayers go along with a plan their own central bank is highly critical of?"

Slowing growth for sure... yet the US Stockmarket keeps going up despite all the bad press saying it will crash (and the blogosphere is full of such claims). I guess there is a certain amount of cash in the world that has to go somewhere ... if it can't go into Real Estate as that is falling, and Bonds and Treasuries yield almost nothing, then stocks it is!

A certain amount of high soft commodity prices may be structural, from the Westernisation of the Eastern diet for example, and population growth. People have to eat!

I can see that NZ on balance is in a pretty good position on the whole, when compared with other countries. No matter what happens, people have to eat and the NZ dollar will always cushion a sell-off in commodities as it will drop if that happens, meaning prices in NZD terms stay fixed.

On the whole, I'd say that as long as the NZ government can curb spending, we are in pretty good shape on a global basis, no matter what happens.

"The US is important as the largest single market. Forecasts for the year were growth of about 4%, but 2.8% was achieved.  It is struggling to maintain that slow rate".

Actually, it's either being fudged, or it's an incredible achievement.

Energy supplies within and to the US have at best flat-lined, and probably dropped. No goods and/or services are produced without the stuff, so (aside from money-begets-money transactions which are essentially horseshit) it bespeaks an increase in efficiency of some note. One suspects that it's more a case of jettisoning inefficiency, which doesn't require new plant.....

3% growth doubles in 24 years, so 2,8 isn't slow', it's something that absolutely has to crap out before 24 years go by.

Well before.

I was at a lecture today Neville, which suggested 10 years might be about the absolute limit that things can be strung along to. But it wasn't likely.

 Signs not respected enough – even neglected.

Neville – I’m amazed that the majority of economists and politicians still not consider climate change as one of the biggest driver causing economic limits – even devastating consequences for societies.

You mention increased food and energy costs, but not one word on climate change - the major cause of it. Climate change and its consequences could easy cause, not only the greatest financial, but social burden the world will ever face.

Cost of tackling global climate change has doubled, warns Stern.

Looking into current developments on many fronts – the world will never recover again,  simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.


I have a high regard for your cynicism about "predictions of growth".

What I think even you are missing, is the role that urban land prices play in "the speed of an economy". What is buried in "USA" AGGREGATE data, is that the USA's economy IS a 2-speed one. If the Southern and "heartland" States with no urban growth containment regulations, low taxes, low regulations, employer-friendly laws, etc; were a separate economy, that economy would have had NO economic downturn or crisis AT ALL over the last few years. Even now, without the growth in that "economy" balancing out the losses in California, "the USA" would be in far worse trouble.

It is sickening that this whole crisis gets portrayed as "the failure of the free market", when the ONLY part of the world that still IS and always has been CLOSEST to the "real thing"; is the part of the world in the LEAST trouble. Of course the socialists in the mainstream media will not be quick to note this.

Germany is another significant "housing bubble free zone" that is propping up economies all around it.

Japan's economy is certainly not being HINDERED by its urban land prices having reverted to sensible levels after they peaked 20 years ago.

The fact that China and India now have the world's most absurdly overpriced urban land, is merely a sign to anyone with half a brain, that "Asian Crisis 2", bigger than ever, is imminent.

"Property inflation is wealth"; is the biggest idiocy of economic history. The inflation of property prices significantly ahead of incomes, is ALWAYS a harbinger of doom, not of happy days.

The underlying problem is distortions and rent seeking in urban land markets and especially in their development processes. Look at the insane layers of speculative "flipping" that occurs in China, that results in thousands and thousands of empty apartment blocks that the millions of people without a proper home, cannot hope to afford. Without corrupt and mis-incentivised Communist Party officialdom, these apartments would be sensible prices, and would be filling with grateful residents lifted out of insanitary conditions. But when the crash comes, what do you want to bet that the narrative in 90% of the media will be "China's experiment with free markets has failed too"?

What we need to get clear in the public narrative, is that there is a difference between "private enterprise" and "capitalists"; and "free enterprise". "Free enterprise" is what Texas has got. I don't like to use the term "capitalism" any more as it is hopelessly tainted. But of all the people who always said that "capitalists" who collude with the State to gain competitive advantage should be hung/shot/dismembered; probably the strongest such condemnation came not from Marxists, but from Ayn Rand. The title of one of her books, "Capitalism: The Unknown Ideal", pretty much says it.

 PhilBest - your article - another confirmation of what I have written above.

 Looking into current developments on many fronts – the world will never recover again,  simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

I find your comments really interesting and well thought out.

You are right about Germany - they have not had a house price bubble, so their money has been put to productive use. Part of this is cultural, there is no such concept of a 'property ladder' in Germany, they have never even heard of it.

Speculation on real estate happens because it's one of the few ways that retail investors can get massive amounts of leverage at low interest rates.

I sit next to a Chinese guy at work - he says that most of China's new millionaires are property investors. This is not sustainable, but I think that China has built up enough reserves over the years that they can have a property crash and it won't affect them too much.

Urban development has actually been blighted through most of economic history, by rent-seeking, semi-monopoly rent, urban land price inflation and speculation, and cyclical volatility. It is long periods of genuinely free markets in urban development, and low stable urban land prices - correlating strongly with sustained economic growth - that are the "abberation" that needs explaining. I think the answer is to be found in the social attitudes following WW2 in particular, that demanded a "fair go" for the soldier generation re affordable homes.

But the history of the famous cut-price housing developer Bill Leavitt in the USA, is marked by years of antagonism and political maneuvering from the rent-seekers who were shut down for the first time. Not that it is at all common for anyone to notice that it was not just young GI's who benefitted, or merely a matter of Mr Leavitt making a profit; but the whole US economy benefitted from the low and stable urban land costs that prevailed for some decades. If the US economy had behaved like the British one following WW2, "2008" would have happened in 1960, 1975, and 1990 as well. The British didn't have Bill Leavitt, they had the "Town and Country Planning Act".

3) Trend of oil, depends on what you look at I guess...Brent yoy looks upward, WTI yoy looks downward....



Doh...I can't see why you put oil at #3 because *everything* revolves around it, yes the world economy is flat but then again so is the production of energy cheap oil, cause or effect? I know which way I'd bet



Hence when Philbest says texas is the last bastion of "western civilisation" I just have to laugh....cause...simple.....and IF it is at $120 odd a barrel and IF thats the new normal which seems very likely for the foreseeable future its at best going to stop what ever fantasy of a recovery ppl see....Unless that is we can some how disconnect from the retalionship of 4% GDP growth has to have 2.5% more energy....which seems impossible.

Its strange that most economists dont see oil as critical, its just a commodity...I think that this is a hard lesson they will be lernaing shortly....The paradgym shift from cheap and plentiful to expensive and scarce will chnage their thinking....Hence Westpac's comments are a joke IMHO.


PhilBest's an interesting example. He's probably go more than 1001Q, but chooses to put the desired conclusion first, then move heaven and earth to substantiate it.

You end up doing an 'old woman swallowing a fly/horse' going down that path. Perhaps some DNA has 'follower' or 'believer' stamped on it, or it's just that some crania are wired wrong.

I think he's a lesser evil than the hucksters who deliberately seek to spread lies.

Them - and their comments - I'm starting to document. Someone has to write the history of this unfortunate period.