16/01/2016 Talking Business

Welcome to London, I'm Tanya Beckett.

What is on the horizon for the economic landscape this year?

2015 was dominated by concerns over the slowdown in China,

falling oil and commodity prices, and the worst refugee crisis

since the Second World War, as migrants fled into Europe.

to stay competitive in such a tough environment.

On this week's Talking Business, we'll be looking at what's likely

Disappointing and uneven is how Christine Lagarde

has summed up growth prospects for the global economy in 2016.

The managing director of the International Monetary Fund

believes the world's sputtering economic recovery will continue

to disappoint this year, with rising US interest rate

and a slowdown in China continuing to take their toll.

In its latest global growth forecast, the IMF estimates

that the world economy will expand by 3.6% in 2016,

In the eurozone, growth is expected to be a whisker up

Advanced economies will also hardly change, rising from 2% last year

to 2.2%, while emerging markets are expected to achieve growth

So how realistic are those growth figures,

and what's in store for businesses this year?

We've brought together a panel of people who have lived

through the ups and downs of recessions and recoveries

to hear where they think the risks and opportunities lay.

Bronwyn Curtis is an independent economist who's worked for some

of the biggest banks and financial institutions in the world.

Lord Digby Jones has held some of the highest positions in British

business, he was director general of the employers' federation,

the CBI, for six years, and then UK trade and

And Diana Choyleva is chief economist and head of research

Digby, let's start with you, because of your background

of being very closely involved with business -

the world is a very complicated place at the moment,

particularly so, I think it's fair to say, and the economic forecasts

from the IMF, although they are better than they were for last year,

they almost belie a rather more complicated picture, don't they?

Yes, in your introduction, I was pleased to hear but surprised

that the average growth of the world's economy was as high

as it is going to be, and that is good news,

because I think the penny is dropping, or the pfennig

is dropping, or the yen, the renminbi or anything else

is dropping that no part of this global economy can ever again say,

"What's happening over there is nothing to do with me."

I think the whole thing is so interlinked, so you have,

politically, somebody who invades Crimea, so somebody in Washington

put sanctions on that, so someone who makes a piece of kit

in Birmingham and sells it to Russia is told they can't.

I think people are now understanding that whatever happens politically,

economically in the world, it is no longer in isolation,

and the butterfly that beats its wings does create

Bronwyn, I think this has become painfully clear in the context

of the oil price, hasn't it, in its dramatic fall

that we've seen over the last 18 months or so?

Would you say that is the largest factor on the horizon at the moment?

No, because there are some money factors, and Digby obviously

One of the things about the IMF forecast is they are going to be

wrong, and the history of forecasting since the crisis

is that most of the big forecasters overestimated growth,

and of course oil falling and, as you said, it is a big lever,

and it has fallen to such a level, it starts causing political

Whether this is just cause, and that is why I am worried

by the slowdown in China, or, you know, lots of credit that needs

to be paid back by emerging markets, or something else, then,

But what it does is create huge political pressures

Diana, how would you describe what you are seeing right now?

The two key things that markets have been worried about

at the start of this year, the sharp slowdown of growth in China,

the mismanagement, if you like, of the equity market there,

and also the collapse in oil prices and commodity prices more generally,

is exactly what this world, still lacking genuine consumer

demand, actually needs, because lower commodity prices,

oil prices, on the one hand caused by the much weaker growth in China,

on the other hand of course the global supply glut,

they transfer income from producers to consumers.

So, actually, the omens are good for the developed markets,

and in particular the consumer in those developed markets.

Digby, what Diana seems to be saying here is we shouldn't worry so much

about China, because there is always another market -

That's right, inasmuch as China is one market,

but I would actually put a complete barrier between two

The oil glut, the reduction in oil prices is entirely manufactured.

But China's slowing down is not the reason why Saudi Arabia turned

every tap on known to man to get the oil production up

It's enormously, strategically political.

It is not about a response to any form of global slowdown.

I do on commodities, Australia and Chile from the Atacama,

not pumping it out into China as it used to.

But the concept being a product of something like the Chinese

economy or Brazil closing, slowing down, is not true.

Let's ask Bronwyn this question as well, oil has always been

highly politicised - perhaps the game changer

was the fact that the US very desperately wanted to become energy

independent and has gone a great way down that path to achieving that,

and that is what has queered the pitch a bit, isn't it?

Well, yes, I don't agree entirely with Digby about this idea

that they have just turned the taps on.

All commodity prices, as we said, have gone down,

and there is a lack of demand in the world.

You look at every country, look at the US, OK?

Consumer demand is going to drive growth there this year again.

I look at the UK, exports will struggle.

But how is it, then, we can have this very dramatic fall

in commodity prices, and you are explaining it is in part

at least by a physical mismatch between supply and demand,

and yet we are getting the economic forecasts which are suggesting

Those things don't fit together, do they?

I think they are more a reflection of a lack of demand in the global

There is a lot of supply, but it is both things.

There is not a global reduction in demand in every country.

Let me just address one of the mismatches,

that we are seeing a huge migration crisis at the moment.

Bronwyn, what economic impact has that had?

Firstly, I come from a country of immigrants, OK?

I am a great believer in immigration,

and I think having younger people, people who are really keen to work,

to make a new life, I think really helps

The problem is that you are seeing so many, and managing so many

new people coming in so quickly is really difficult.

And I think the biggest fallout, of course we've got elections

in 2017 in Germany, and we've got elections in other countries

in Europe this year, and you'll see this move to the left

and mostly to the right, and the right wing will become

anti-immigration, will become a much bigger thing,

Digby, just briefly, from a business point of view, how

We have a dearth of skilled labour in Britain, for instance,

and it is not much better in America, nor is it anywhere

near good enough in Germany, so not just a British issue.

But productivity is damaged by one thing mainly,

which is the lack of application of skilled labour

to the production process or the delivery of goods or services.

Instant fix is bring in some skilled people,

say, I'd like a skilled person from India before

I have an unskilled person from Slovakia, say.

Now I'm being told I can't stop the unskilled person from Slovakia,

whereas you can stop the skilled person from India.

There is another important aspect in the euro area.

When it comes to the immigration from Syria.

The point is that, actually, the euro area has not adjusted

You can't say it has rebalanced successfully

at the huge rise in unemployment in Spain, Greece, Portugal,

and those with a huge loss of income.

Now the euro area has started to improve, but if you have this

influx of even more skilled or unskilled labour,

it becomes very difficult for the euro area as a whole

to adjust properly, and it creates the unnecessary political tension.

The problem you have got, as you rightly say, in southern

Europe you don't have an infrastructure or economic growth

The genuine asylum seeker escaping conflict you can accommodate that.

You can't do it if you mix it with millions, probably,

of people who just want a better life.

Thank you all for now, and later in the programme

we'll be looking at the prospects for business in Europe.

But first let's hear some thoughts from our comedy consultant

Colm O'Regan, who is venturing into the murky world of financial

forecasting in this week's Talking Point.

It's January, broadcasters all over the world

Predictions are great fun, you can't be wrong yet,

and if you are wrong, it will be a year

before anyone calls you up on it, and to be honest, no-one ever

bothers to check back, they just get on with their lives.

Even economists themselves don't take it too seriously.

As JK Galbraith once said, economists don't forecast

because they know, they forecast because they are asked.

Some people say forecasting the economy is a game of chance,

but I still have faith in forecasting.

I just believe in reducing the term of the forecast

I call it, O'Regan's rainfall radar theory of economic forecasting.

You see, I am a rainfall radar fanatic, I cannot

take a trip of more than ten yards without checking my phone

to see where and when exactly it is going to rain.

Some people in Ireland prefer to just do a more vague

version of forecasting, like it'll either be grand

Not me, I want to know exactly, and in a way it's a bit

like the economic forecasting, knowing what's happening now

and extrapolating a little bit forward

It's just like what Jim O'Sullivan does.

The big question for markets, and certainly people

who are trying to track what the Fed is going to do,

The interest rate that the Fed controls is arguably just one

influence on the overall economy, so they are really

trying to calibrate all the pluses and minuses for growth,

the headwinds and tailwinds, at all times.

It's funny you should say that, Jim, I was watching the hype

about the Fed rate rise, and to be honest, I want a piece

In fact, I've got my very own weather forecasting

Of course, they say that weather forecasters

were invented to make economists look good.

It is also said that predictions are difficult,

So moving to the global economic weather forecast,

It looks like dark clouds on the horizon, but the Chinese

authorities ensure us that it is fine, it is actually just smog.

In America later in the year, Storm Trump will provide a stimulus

to the construction industry with plans to build a giant wall

Turning to Europe, and an organised weather system will break up

with one isolated shower moving off in its own direction.

And looking to the longer term,

climate change - sure, we'll all be dead by then!

If you ask what is going to happen in 2016, you'd say, well,

the long-term trend is 2% growth or 3% growth,

whatever you think it is for your particular country.

But of course, in the short run,

there can be huge fluctuations depending on cyclical forces.

There are pluses and minuses all the time.

animals spirits which jump up and down.

Yes, animals, I suppose he means how confident are animals

Frankly, they are the hardest part of the forecast to model.

What we've learned from Jim is that the quality of your forecast

depends on the quality of your data, the quality of your ability

to interpret that data, and most importantly

your flexibility in adjusting your forecast if that data changes.

Speaking of which, my rainfall radar tells me

that it's going to rain very soon, and I am going to adjust.

Our fair-weather friend Colm O'Regan there,

with his own take on the stormy world of forecasting.

And remember, you can see more of his short films

on our website, bbc.com/talkingbusiness.

Now, continuing the weather forecasting analogies,

let's find out if our experts think there will be much sunshine

Here in Britain we have doubts, of course,

as to whether we want to stay within the EU.

Digby Jones, let's come to you first.

I think for many, many years now, the British

business community, especially those under the big business,

have failed to see the value added of being within.

Everybody thinks it's best to be within a trading bloc

What they are failing to understand now, and its becoming clear every

There is an enormous lack of competitiveness coming out

of Brussels, and they are saying, how

are you helping me when China wants my lunch, India

wants my dinner, and you are sitting here tieing my hands

Diana, do you think the progress of Europe has been called

Well, my view is that Europe as a whole has not

adjusted, and, actually, Britain sitting in between,

if you like, not part of the euro area but has not

adjusted as far in terms of its imbalances as America has,

the economy here has recovered, and consumer spending is likely

But when it comes to the supply side, and all the bureaucratic

constraints that come out of Brussels, I can understand

Actually, most likely the decision will be

made on emotion, rather than sound discussed arguments,

I think it might cause huge pressures

within Europe too, you know, and in the eurozone,

and could it lead to the splitting up of Europe?

to put that worry there, but one of the reasons that the euro

was put in place was to stop any war in Europe again,

and keeping France and Germany in the same place,

and I think the risk of the UK leaving is that Europe breaks up.

And to add to that, the first thing that would happen is Ireland,

inside the euro, and Sweden, outside the euro,

would both say, "I think we might have some of this."

You know, there is a knock-on effect, politically

and economically, which I think at the moment

Brussels and Berlin are incredibly worried about. Yes.

Actually, though, if I can interject,

the likelihood of the euro area not remaining what it is right now

whether Britain exits or does not exit, is quite high.

The problem is that the Second World War, for the calamity it was,

did not actually result in political union

in the European or the euro area.

And the single biggest economic problem for that area

is the existence of the euro without political union.

Right, let's move on to another discussion,

and that is interest rates going up in the United States.

Inevitably, it is the responsibility of the central bank there

to act in the interests of the domestic economy,

not the international economy, but with the benefit of hindsight,

to start to tighten monetary policy there?

The Federal Reserve should set interest rates

depending on their domestic conditions.

And in fact, rising interest rates in the US is not necessarily

what is causing problems in the rest of the world.

Digby, there was a debate just before interest rates went up

about whether, actually, persistently low interest rates

were a bad thing, because people just saw that as being normal -

is there a risk of complacency among businesses and borrowers,

wherever they are, that interest rates, you know,

I don't think it's about complacency, because complacency

means, in one way, we're going to make a while the sun shines

and not care about tomorrow, and that is not what this is about.

Firstly, what Yellen did, she shot the market fox.

Yes, what she has done is shoot the market fox.

They have been talking about this for six months,

nine months, every month went by,

and finally done, finished, get it out of the way.

So in that respect, do I think it is hurting anything

Do I think it has mattered a lot? No.

I think in the UK too, I think interest rates

Well, I actually think we are creating distortions.

I think there is borrowing that is going on,

low mortgage rates, that, you know, you should be able to withstand

another couple of rises here. But why?

Because, actually, if you have a downturn,

another downturn, you do need to have something in the tank...

You tell that to the house builders in this country,

who create loads of especially young jobs,

you tell that to small businesses watching this programme.

At the end of the day, if the only reason

you are going to do it is because people think we should...

It is creating distortions, I mean, people are doing...

No more distorting than if you put it up.

Can I just ask Diana what she thinks about this?

Well, I certainly disagree, Bronwyn, that you should raise interest rates

so you can bring them down again, because at the end of the day,

they could if necessary use quantitative easing

and quantitative measures to ease monetary policy.

But what I firmly believe in is that, if you have created

distortions in the economy am a big distortions,

as we did in the run-up to the financial crisis

to clean those distortions as soon as possible.

Bronwyn, I'm going to ask all of you,

but Bronwyn first, very briefly, how do you see the outlook for 2016?

Just a sentence. Difficult!

And I say difficult because I think China is leading the renminbi,

their currency, fall substantially, which

means they will start to export deflation.

So inflation is already very low in the world,

and so we will see, perhaps,

it being pressured on the downside even more.

OK, Digby? I think globally as you were.

But never underestimate the resilience of the US economy,

is doing much better than people thought.

UK-wise, I would say that the Chancellor,

he is being necessarily politically cautious,

because he doesn't want to be a hostage to fortune,

but I think the UK economy at the moment

is doing better than people think. Diana?

My view is that developed markets, in particular the US,

will do well, and also the euro area cyclically.

The trouble will be for emerging markets, in particular China,

which goes through a very difficult adjustment,

but also commodity producers and other emerging markets.

Well, thank you very much to all of you,

Bronwyn Curtis, Digby Jones and Diana Choyleva.

That it from Talking Business in London,

but do join us again next week when Karishma Vaswani

will be in Singapore discussing the new Asean economic community.

Good evening. Some of us have seen quite a bit of