When the economic good times roll, as they have for much of the last decade, there are always market pundits who convince themselves that the cycle of growth and recession has finally been disrupted and that growth will now be constant. They have yet to be proven right and it might be that yet again, they are about to be proven dramatically wrong.
Markets prosper on confidence. Three events are taking place that could rupture that confidence and trigger recession. The suspension Tuesday of trading on the Tokyo stock exchange happened because unprecedented quantities of sell orders threatened to overwhelm the stock exchange computer. The panic was triggered by fraud allegations at a leading Japanese Internet supplier and former market darling. Bad news from US high-tech stocks compounded Tokyo anxieties. The world’s other stock markets yesterday demonstrated how globalized they have now become. In stark contrast, eighteen years ago, when Western markets collapsed, Japan’s investors carried on as if nothing had happened. Fueled by a property market boom, they sustained their boom until the property bubble burst, by which time Western markets were heading back to recovery.
It is the other two events that are ensuring that Japan’s problems are not this time occurring in isolation. The nuclear confrontation with Iran is having a significant impact on the price of oil. UN-sponsored sanctions against Iran, though still a long way off and by no means certain if Russia and China do not back them, have stirred real fears of the $100 barrel of oil. Ironically the activities of a rag-tag group of Nigerian militants have proved a catalyst for the oil markets. Angry that their Niger Delta region has not benefited from local oil production, the militants kidnapped four Shell workers a week ago. They now threaten to attack installations operated by all oil companies unless the Nigerian authorities release their leader from detention.
Optimists will of course point to the strength of the Chinese market which is driven as much by the release of pent-up domestic demand as it is by China’s emergence as the world’s low-cost manufacturer of just about everything. It is China’s insatiable energy demand that originally pushed up oil prices. But Beijing would not be immune to a global recession. Indeed its shaky financial system and current property boom could each lead to a collapse that would only compound troubles globally.
The trouble may indeed pass for now, even though the current dangers seem altogether more concentrated than those which in the past have caused simply a pause in market and economic sentiments. Nevertheless now is a good time to remind ourselves that growth is neither inevitable nor constant and that every so often, the difficulties of recession must be faced. Thanks to globalization, no one will escape the hard times when they come, not even the Kingdom. The $100 barrel of oil, while boosting oil-producers’ revenues, will damage economic activity worldwide and as is now clear by its WTO membership, Saudi Arabia is inextricably linked to the rest of the world.
