Globalisation and investment cycles – what could possibly go wrong?

I have spent the last two days immersed in the Grand Hotel Brighton with the great and the good of the institutional property investment market at the Investment Property Databank (IPD) and Investment Property Forum (IPF) annual conference. It was a very thought provoking event and a pleasure to catch up with old friends and meet new ones. The quality of conversation was excellent in that it challenged my limited economics knowledge and at the same time enabled me to learn from such exceptional economics commentators including Robert Peston (BBC Economics editor) and Gerard Lyons (adviser to Boris Johnson).

Of note and something we can take solace from is that the world economy has grown in the last five years and quite significantly. in 2000 the world economy was $32 trillion, in 2008 it was $62 trillion and in 2013 $74 trillion. This growth is not just inflation but also strong economic activity. Also of note is that 2009 was the only year of global economic decline when it was just less than -1%. On average annual growth has been 3%-5%. Dr Lyons went on to say that if the growth continues at 3.5% per annum then the world economy will have doubled in 20 years!

Dr Lyons then told us about the different growth dynamics. In the past there was 2 speed growth (slow and fast lane), then it developed to 3 speed growth and then most worryingly multi-lane growth like a US highway where you have no idea which lane you will be overtaken in. These growth patterns are determined by Earnings, Liquidity, Economic Issues and Political Issues – all of which are very different depending on where you are in the world. In years gone by when big corporates were in good health, which they are today, then they would reinvest their profits creating important growth catalysts. Today, however, many are not due to the uncertainty of the global world we live in and are choosing to buy back shares to consolidate ownership.

At a UK level, where austerity is discussed daily, the frightening fact is that UK debt stands at 1.4 trillion up 80% in the last 6 years. So if we think we have seen austerity then you haven’t seen anything yet!

Globalisation has resulted in fierce competition where the net result is the rise of the Chinese middle class and the fall of the UK working class as manufacturing disappears to factories far afield. In the US, however, there is a significant increase in on-shoring and perhaps Barack Obama’s announcement today on the Mexican immigrants is part of a grand plan!

Finally, as mentioned earlier it is all about globalisation at all levels and not just globalisation but urbanisation. 54% of global growth comes from the top 600 cities and is estimated to grow to 64% in the next ten years. Currently 137 of these global cities are located in the West but this is forecasted to drop to 20 of which the UK will have one which is London!

So we have interesting times ahead and what was clear throughout the conference is the importance of credible time series data to see how theory and forecasts become reality.