Every year, just before the holidays, we take a look back and assess the big surprises of the past 12 months. Needless to say, there is no shortage of candidates for surprise of the year in 2005.
Some would point to one of the year’s natural disasters — the tsunami at the beginning of the year, the earthquake in Pakistan, the horrid hurricane season or the threat of a bird flu pandemic. These situations were compounded by political tensions, with one consequence being very high oil prices. Yet the real surprise is how resilient the world economy has proved to be.
Some would choose the decision by Brazil and Argentina to repay their loans to the IMF, some US$25 billion altogether. The global economic expansion and associated commodity boom has swollen the coffers of many such developing economies. But anyone can see that the best of the business cycle is behind us and that tougher credit conditions lie ahead. These countries will need as much financial credibility as they can muster in 2006-07, and are buying some now.
Some would say that the surprise of the year was China’s decision finally to unpeg its exchange rate. Yet several months later, our description of the event at the time as a “yuan yawn” remains apt, for nothing of significance has happened and, sure enough, the cycle is beginning again with renewed demands for an adjustment to the yuan. This cycle will be even less surprising in 2006.
Some would argue that the surprise of the year was that the U.S. economy did not collapse under the weight of its unprecedented international trade deficit. Indeed, the U.S. dollar actually rose during 2005, contrary to most forecasts. But in a world economy that has gone global, in which international trade is increasingly within companies rather than between countries, trade imbalances do not have the same meaning or shock value that they used to have.
Which leads us to our choice as surprise of the year — the C$39 DVD player that university students packed in their bags this year when they went off to school. Beyond the implication that someday the price of a DVD player may fall to zero, this observation has profound significance.
The DVD player is a symbol of the increased productivity of the global economy, which is delivering lower prices for a wide range of consumer goods throughout the world. Falling prices are increasing purchasing power everywhere, and even help explain Greenspan’s conundrum — which is that higher short-term interest rates have not led to higher long-term rates. Why? Because inflation is so under control that investors are confident that it will remain so, even with higher energy prices. This confidence is a product of the global productivity boom, at least in part.
The bottom line? 2005 will be remembered for many things, a lot of them bad. But we should salute the positive effect that higher global productivity is having today and will continue in 2006 — lower prices, lower interest rates, more purchasing power, and solid growth in employment.
December 22, 2005
The views expressed here are those of the author, and not necessarily of Export Development Canada.