For years economists had been warning that many of the world’s larger economies were looking unbalanced. A boom in house prices in the Anglo-Saxon economies led to a surge in debt-driven import levels that did not look sustainable. But the imbalances continued, year and year again, seemingly confounding expectations. That was until the American housing market implosion provided the spark for a worldwide sell-off of stocks and commodities, runs on inadequately-capitalised banks, and volatile currency markets. Complex and globalised financial markets meant that the losses were not confined solely to the US.

The earliest hint of the crisis in Europe was the run on Northern Rock in Britain, when pictures of queues snaking outside of banks were beamed around a shocked world. Governments had to act, and so they did with the nationalisation of banks in many countries. Generous state guarantees of savers deposits followed, chaotically at first. Eventually cohesive European policy was designed, and a repeat of the 1930s currently seems unlikely.

Recession seems probable in most developed countries, but should be avoided globally. This could see a shifting of economic power towards the east although some Asian countries do seem to be suffering, notably Pakistan and South Korea.

Stock markets worldwide appear to have a found a floor, despite continuing volatility. The bad news will be heard less from the financial sector but will now start to increase in the real economy with unemployment and consumer spending starting to deteriorate. Deep and repeated interest rate cuts are expected. In the long-run, the slowdown of 2008/9 will lead to a much-needed rebalancing of the world economy, though the economic pain in the process will not make it an easy task for those exposed to worldwide markets or in need of credit.

The outdoor sector has been somewhat cocooned from changes as outdoor purchases are not seen as luxury items but as necessary everyday lifestyle purchases. But we are not living or working in normal times. It is not a business as usual situation and we cannot therefore do what we have always done and expect (or even hope) that it will all work out.

As a whirlwind storms around us we need to learn how to change and adapt to cope with the immediate and future world changes. A few weeks ago the questions was how could we avoid recession, now the question is how bad will it be.

A US perspective
SNEWS®, the leading trade news service for the US outdoor and fitness market, recently published an interesting view of the US market in discussion with Clyde Prestowitz, founder and president of the Economic Strategy Institute which we have excerpted with permission below. The full story, “Our worsening economy: A snapshot of what the future may hold for our industries” is available at www.snewsnet.com to SNEWS subscribers.

While the real estate markets play a key role, the US economy has primarily been weakened by the fact that our trade deficits, consumption and borrowing greatly exceed our exports, production and savings. Prestowitz noted that in 1981, the trade deficit was US$27 billion a year and that was thought to be huge and not sustainable. Today, the trade deficit is about US$850 billion.

“We now have a tilted world in which the consumption in the global economy is largely in the US, and savings and production and investment is outside the US, largely in Asia,” said Prestowitz. “This has created a world in which the US accumulates each year another US$700 billion to US$800 billion in deficits.”

One major problem, experts told SNEWS, is that, for a very long time, the United States has been building a domestic consumer economy, and now consumption accounts for 70 percent of US GDP. Because we are consuming so much more than we produce, we must borrow from the rest of the world. “The US economy needs a daily injection of US$3 billion of foreign funding net — that means we really need US$7 billion a day of foreign funding,” said Prestowitz. Compare that to China, which has about US$1.7 trillion of reserve savings, or Japan, which has about a trillion dollars in savings, he explained. As these countries save, they also use money they make from exports to the United States to buy US Treasury bonds and invest in American companies.

Now we are to the point that the structure of the US economy has so weakened the dollar that countries do not get a good return when they invest in US dollars: “For a while everyone was happy, because we were living beyond our means,” said Prestowitz. “If everyone kept on buying and borrowing, and Asians and Russians would promise to keep producing and lending, no problem. But nobody can make that promise, and the promise is breaking down. They have so many dollars, and are getting a return of only 1 or 2 percent. In the US, everybody is so in debt they begin missing payments and the scheme unravels.”

Long-term implications
Prestowitz said he sees major economic shifts coming our way. “Costs of energy have increased dramatically for things like shipping a container overseas,” he said. Due to energy costs, the high price of manufacturing overseas and the weak dollar, he said that much of the production that has gone to Asia would come back to North America. SNEWS has already seen a few companies bring back some manufacturing to North America with others whispering of that in the future.

Also, he projects that the dollar might no longer serve as the world’s main currency. “Already, Kuwait has unpegged its currency from the dollar and floats its currency against a faction of currencies — the dollar, Yen and Euro,” he said. Also, there has been a lot of discussion about pricing oil and international commodities on a faction of currencies. “Once that happens, the US will not be able to run big trade deficits,” said Prestowitz. “If America wants to buy oil, it will have to make something or provide a service to earn Yen and Euros to buy a barrel of oil.” Eventually, consumption as a percentage of GDP will have to drop.

“The day in which the US is the overwhelmingly dominant power,” said Prestowitz, “is going away.”

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