Economic power shifts East

Dubai: The upheaval in the global financial system will cause more economic power shift from the West to the East, economists and financial experts believe.

Even though bank bailout packages worth hundreds of billions of dollars in the US and Europe have boosted market confidence for now, the crisis in the financial system is expected to reverberate in the wider economy, and its fuller extent is not yet assessed.

"The [global] financial sector is in full-blown recession. Jobs are being lost and people are discounting fairly bleak future for the financial sector. That would also be reflected in the [broader] economies of the West," Alex Barrett, the global head of client research at Standard Chartered Bank, said in Dubai recently.

Barrett expects unemployment to rise substantially in the US and Britain.

"It is argued that the UK has got probably the weakest outlook of all economies globally. We are expecting the economy to shrink to something like two per cent next year," he said.

While the West suffers, Asian economies are not immune from the larger economic turmoil.

Gross domestic product growth in some of the best performing Asian economies such as China and India will slow down as world trade falls and investments shrink.

Economic growth in the Middle East, China, Brazil, India and Russia will slow down but they would not see an outright recession, Barrett said, and added:

"We are in the midst of this huge shift in economic and financial power from the West to the East."

However, Gulf Research Centre economist Eckart Woertz said it is premature to talk about a major East-West shift in economic power.

"There is no doubt that Asia is rising and its significance in the global GDP has grown over the years, but it has a long way to go to match economic and military power of the US and Europe," he said.

He said Asian economies have an export-led growth model that relies on deficit-spending and demand in the US and Europe.

Huge fallout

"There will be huge fallout in Asia if Western countries slide into recession," Woertz said.

China's growth is expected to fall to 7.9 per cent next year from the projected 9.5 per cent this year and the 11.9 achieved last year, according to the Standard Chartered economist.

India is slowing down, but its economy is seen picking up faster than China by 2010. However, Barrett does not see a US economic recovery until 2010 and 2011.

Countries with current account surpluses, such as those with high oil export incomes in the Gulf, are seen as "clear winners in the developing world".

China's foreign exchange reserves are close to $1.9 trillion (Dh6.97 trillion), Russia's $500 billion and the GCC holds hundreds of billions of dollars.

Robin Farrell, the chief executive officer of London-based an asset management firm Arch Group, said recently that "there should be a huge transfer of wealth from the West to the East" as the current crisis could result in deflation in the West.

Zahed Chowdhury, head of research at Deutsche Bank, underlined the transformation the world has undergone since the 1997-98 Asian financial crisis, which had put huge debt burden on many Asian countries. "In the next 12-24 months, emerging economies of Asia and the Middle East will see higher growth than the US and countries in Europe," he said.

However, the policy response in the West through bank bailouts has helped shore up confidence in stocks markets and financial institutions on the brink of insolvency.

"Possibly we have passed the point where the fear was at its maximum," Barrett said.