Stores 2008 Global Powers of Retailing - (Page 43) 2008 global powers of retailing One school of thought holds that the rapid growth of China and India puts us in an era similar to that of the immediate post-war era in the 1940s and 1950s. At that time, the rapid growth of the global economy spurred very rapid growth in the demand for energy — far higher, in fact, than what has been experienced since the late 1960s. At that time, however, oil supplies were in abundance and demand was met without high prices. It would be expected, however, that higher prices would constrain demand. Indeed, this may happen — especially in developed countries. Yet the strong economic growth in emerging countries will probably overwhelm the effect of rising prices on demand. Given today’s supply constraints we may be entering an era of relatively high oil prices. considerably on a global basis. This reflects growing demand, declining use of agricultural land, and government subsidies for biofuels. Second, many countries have experienced dramatic rapid growth of the money supply. In China, for example, rapid money supply growth stemmed from central bank currency intervention aimed at suppressing the value of the Chinese currency. As discussed above, much of that money supply growth fueled asset prices. Yet it appears that it is finally having an impact on goods prices as labor and product markets have become tight. Finally, the declining value of the dollar is likely to be inflationary in the US as well as in those countries that tie the value of their currencies to the US dollar. This includes many emerging nations. What happens next? As Alan Greenspan suggested in his recent memoirs, central banks may soon face a more challenging environment in which to control inflation. The favorable impact of globalization on inflation has been a temporary phenomenon that will eventually end. The entry of China and India into the global economy, by adding huge numbers of low wage workers to the global pool of labor, put downward pressure on wages and prices. Yet the process of integrating these giant countries into the global economy will not last forever. Once largely completed, that particular restraint on global inflation will likely be removed and central banks may face a somewhat worse environment. Is inflation coming back? One of the sterling economic accomplishments of the past generation was the end of serious inflation in most major countries. Yet in 2006-07, inflation began to rear its ugly head in many major countries. Inflation accelerated in the US, the European Union, China, and India. Are we in danger of a new era of inflation? And, if so, what would this do to economic growth? To address these questions, it’s important to first consider four major reasons why inflation went away: 1. Monetary policy got better. Independent central banks in both developed and emerging nations consistently kept money supply growth under control so that inflationary expectations were reduced. This is critical. After all, if expectations for inflation are low, workers and businesses will be less aggressive in seeking higher wages and prices respectively. 2. Globalization has had a salutary effect on inflation. The massive increase in the global labor force and in global productive capacity put downward pressure on prices. 3. Money supply growth influenced asset prices rather than goods prices. Goods inflation takes place when too much money is chasing too few goods. In this case, that money chased assets such as equities and property. 4. The accelerated improvements in information technology in the past two decades contributed to rapid productivity growth. This enabled stronger economic growth without creating inflationary pressures. So why is inflation now on the rebound? There are several reasons: First, the global economy has been growing at an exceptional pace, thereby putting upward pressure on commodity prices — including oil. Food prices, in particular, have risen Summary outlook for the global economy Global economic growth in 2008 is likely to be slow, largely as a result of a credit-crunch-inspired slowdown in the US. A deceleration in consumer spending in the US will be the principal reason. Growth in Europe is likely to slow modestly due to a decline in export growth, itself the result of a strong euro, as well as from the effects of the credit crunch. Japan will slow modestly as well, although its longer term prospects appear to be better now than anytime in the past decade. The main engine of global growth will continue to be China and, to a lesser extent, India and the major oil producing countries (Russia, Persian Gulf). China will likely accelerate the process of revaluing its currency, thereby increasing consumer purchasing power. Consumer spending growth in China and India should continue to be strong. www.deloitte.com/consumerbusiness STORES / January 2008 G43 http://www.deloitte.com/consumerbusiness
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