Gulf and Asia 'are in a sweet spot'

The Middle East is well placed to benefit as economic power shifts from the Pacific Rim towards the Indian Ocean, believes Deutsche Bank's global strategist.

"Going into 2013, we expect that global growth will be on a stronger footing," says Sanjeev Sanyal, the global strategist at Deutsche Bank.

For Deutsche Bank's global strategist the glass is half full rather than half empty. He expects the world's growth momentum to pick up, even in Europe. The Middle East is well placed to benefit as economic power shifts from the Pacific Rim towards the Indian Ocean. Tom Arnold writes

Deutsche Bank has managed to dodge the sovereign debt turmoil ripping through Europe. The German bank has even leapfrogged BNP Paribas to become the continent's largest lender by assets.

Last week, Sanjeev Sanyal, the global strategist at Deutsche Bank, visited Abu Dhabi for the World Ports & Trade Summit. He spoke to The National about the problems facing the global economy, including the euro-zone debt crisis.

He also talked about long-term trends and predicted a major revolution in the way goods are made and sold. "By the end of this decade the way we produce and consume goods will have dramatically changed."

q&a

q On the global economy do you see the glass half full or half empty?

a It's quite clear that as far as the United States economy is concerned, the recovery is gathering pace. You still have fairly robust growth in Asia even if India and China are slowing a bit from the blistering pace of the last decade. It's Europe where we expect to see a mild recession, maybe something in the range of minus 0.5 per cent GDP growth. There's big differences between different parts of Europe but even then, by the end of the year, we should see the growth momentum slowly begin to pick up. Overall, going into 2013, we expect that global growth will be on a stronger footing.

q What are the main risks to the global recovery unravelling?

a There are always major geopolitical events that could derail the recovery but they are fiendishly difficult to predict. However, there are other risks that could be a problem. For example, it is possible that the problems in Europe spiral outwards and have a knock-on effect on the global situation. There remains a possibility that the burden of the US housing market weighs down the recovery, although this risk is diminishing. In countries like India, we remain concerned by the fiscal deficit and policy paralysis. But on the whole, things are starting to look better and the world economy will be gaining momentum by the end of the year.

q Are China and India the main drivers of global growth?

a The two big boys of Asia will be very important to the world economy in the 21st century. For now, China is the bigger economy and, despite some growth moderation, is likely to generate strong [figures] for the next few years. Remember that its impact on global demand is growing even if it is slowing because its relative size becomes larger with every passing year. India has done very well in the last decade but is still operating well below potential. Still, India has one big trump card over China in the long run.

q What?

a For East Asia, beyond 2020, the single biggest challenge is its ageing population. East Asia has worrying demographics, to say the least. The ageing of China is probably the fastest in history. China's workforce will peak in the next few years and will decline through the 2020s before collapsing in the 2030s. Relaxing the one-child policy in China will have some positive impact in the very long run. But China is already past the tipping point because of a combination of a gender imbalance and a very skewed age structure. South Korea is facing a similar problem and Japan is already in the grips of this. As a result, it is likely that people will have to work much longer into their 70s. The demographics of southern Asia is much smoother and countries like India and Indonesia will benefit from this.

q What about the Middle East with its fast-growing young population?

a Demographics is a necessary but not sufficient condition for high growth since you have to be able to deploy them to grow the economy. However, from a demographic perspective, the Middle East can benefit from a shift in the centre of gravity from the Pacific Rim to the Indian Ocean rim. The Gulf, along with India, Indonesia, Bangladesh and some of the African counties are now beginning to enter a phase where their overall birth rates are coming down but the overall pace of growth of their workforce is going up. They are in a sweet spot where they don't have as many children as before but the [children] born in the last 20 years are entering the workforce. It is very possible that the economic order of the 2020s and 2030s will be all about the deployment of Indian labour in the global supply chain. Suppliers of commodities and markets within the Indian Ocean rim will also benefit. India has 1.2 billion people, Indonesia has 250 million people and there are several other large countries. Commodities-rich places like Australia and Africa, as well as major economic hubs like Singapore and Dubai, will benefit from this shift.

q The US dollar has gradually strengthened since last year as the American economy has shown greater resilience to global economic shocks. Is it too quick to call an end to dollar supremacy?

a Despite all the pain caused by the [global downturn], there is no sign that the world is forsaking the dollar. The world is still willing to finance the US at very low interest rates and the nominal trade-weighted index of the dollar has not collapsed. History shows that once an anchor currency has established itself it can be very resilient and often outlasts the economic and geo-political dominance of the country of origin. That is why Roman coins, Spanish pieces of eight and the British sterling remained global anchor currencies long after the issuing countries had been superseded. It is possible, albeit not certain, that China will replace the US as the world's largest economy within a decade. But, we [Deutsche Bank] feel that the US dollar will remain the dominant global currency for a long time afterwards.

q You've done recent research on how the world economy is at the threshold of a major change in the way it produces and consumes goods and services. Can you outline what you mean by this?

a Over the last several hundred years technological changes repeatedly changed the game. For example, in the cotton industry, India produced the bulk of the world's cotton textiles until the mid-18th century. Then several technological changes happened within a few short decades, some in shipping and others in spinning and weaving. As a result, cotton growing shifted to the US and weaving shifted to the mills of England. India's artisan manufacturing sector was left completely devastated.

The same thing happened to the Detroit car industry when Japan redeveloped the just-in-time supply chain, which was vastly more efficient. We have just entered a new phase where communications technology has turned supply chains into a cloud. This is a world of mass customisation where the old hyper-market model of mass producing and selling standardised products could be fundamentally disrupted. There will be winners and losers within this change.