World economy's reboot will be a gradual one

Berlin—While no one has proclaimed that we’re in the midst of a rebound, registered attendees at the International Hotel Investment Forum (IHIF) rose to 1,600 from last year’s 1,500, providing a measure of hope. That hope was somewhat tempered by the opening session with Roger Bootle, managing director of Capital Economics Ltd.

Bootle told attendees there were many villains to be blamed for this current crisis—bankers, regulators, governments, monetary policy makers, or even market fundamentals in general—but he took issue with a surprising culprit.

“If you had to put responsibility for what’s gone wrong, on a single group of people … [it’s on] a group of people who usually slink away; I mean, of course, the economists. What went wrong with all this, I think, was a failure of ideas. … In particular, [what] got us into all this mess was the set of ideas of how markets work—specifically, how perfect they are. ”

Bootle says the lesson we’ve learned is that greed isn’t good, and that markets aren’t capable of staying on auto-pilot for extended lengths of time.

“This difficulty goes right to the very basics of economics,” he said. “You just can’t leave self-interested markets, self-interested bankers and people dealing with bankers to their own devices in pursuit of their own interests. You can’t blame them for wanting to advance their own interests; they’re human, after all. But the system that assumes that [it’s] going to come up with something stable and for the benefit of all of us is, quite frankly, pie in the sky.”

More importantly, Bootle feels there will be seven consequences of the crisis, and they will be “quite profound:”
1. Banking will be radically transformed.
2. Banks will remain reluctant to lend for years.
3. Consumers face a long period of restraint in order to rebuild their balance sheets.
4. Governments face a long period of restraint in order to reduce their deficits.
5. In the west, capitalism is under threat. There is a danger of excessive regulation.
6. The economic axis of the world has shifted eastwards.
7. Tensions between east and west are set to rise, and protectionism is a major risk.

Recovery?
Bootle said the weakness in bank lending will continue across most of the world, and recovery will be a slow go.

“I think next year in a number of countries, including the U.S. and Japan, growth will be weaker than this year … the rate of recovery will fall back,” Bootle said. “In the Euro zone and the U.K., although that probably won’t be true, the pace of growth will be pretty moderate.”

But Asia is, in many ways, an exception, he said. Emerging Asia, including China, has been able to withstand the problems that have been plaguing the west, and Bootle sees growth there to be much stronger than the rest of the world.

Bootle predicts interest rates will stay low almost everywhere, but he breaks with many economists who see inflation as growing in the near term.

“Inflation is under very sharp downward pressure. I think what you’re going to see, over the next couple of years, is inflation running at very, very low levels—by which, I mean one percent or so, and I wouldn’t be surprised if it even turned out to be much lower than that,” Bootle said.

All in all, the attendees were encouraged to not rely too much on past cyclical behavior.

“This is not a normal recession, and you shouldn’t therefore expect the economy to behave normally in the recovery,” Bootle said,