A world reshaped: American ascendency
"Growth looks more sustainable. We forecast 3% annualized growth in second half of 2013 and for 2014."
Larry Hatheway (Chief Economist, UBS Investment Bank)
Economists are like everyone else – we tend to extrapolate the recent past into the future, basing projections on what has happened. That’s not always a bad thing. History may not repeat, but human behavior typically falls within predictable bounds that can be gauged by past patterns, for example, using ‘regression’ or ‘time series’ analysis. There are times however, often difficult to discern when first unfolding, where structural changes make it less likely that the past will accurately foretell the future.
For the US and indeed the world economy, now may be one of those times. To see why, it is useful to begin with a brief recap of where we’ve been and where we’ve arrived.
For most of us, the financial crisis and ‘great recession’ define our world view. Those twin calamities swept away notions of strong growth in advanced economies, underpinned by rapid credit formation. The ensuing ‘new normal’ of de-leveraging, sluggish growth, low inflation, low interest rates and high unemployment has become the dominant paradigm. Notwithstanding the extraordinary responses of central banks and, in some cases, of fiscal policies to provide offsetting stimulus, growth has remained lackluster. Meanwhile, according to the received wisdom, emerging economies with sound balance sheets, prudent policy-making, and growing confidence supplanted the advanced economies as the engines of global growth.
For a time, that narrative was spot on. And, in some dimensions, it remains relevant today. The US must still cut bloated budget deficits. Europe must clean up its banks, reduce private sector leverage, and undertake structural reforms.
What lies ahead?
In other important ways, the ‘new normal’ is becoming less relevant. In the US, households and firms are again debtfinancing purchases of durables such as autos, houses and capital goods. Banks are easing credit standards and lending more. Growth looks more sustainable. We forecast 3% annualized growth in second half of 2013 and for 2014. The US recovery is broadly-based, supported by housing, credit formation, business investment spending, competitive exports, investment in the energy sector, and household income formation. And, as a result, the Fed is openly contemplating a reversal of its accommodative policy stance.
Elsewhere, change is also afoot. Wrenching economic conditions are yielding more competitive economies in parts of the Eurozone periphery. Imbalances between core and peripheral economies have narrowed, easing risk premiums. Japan has embarked on a series of audacious policies in a dramatic attempt to pull its economy out of long-term deflation. Meanwhile, most emerging economies have stumbled, proving unable to maintain growth as their exports faltered and their economies could not sustain domestic-demand led growth.
The most important changes go beyond those mentioned above. They reside in technological innovations, above all in the US, that are reshaping the contours of key markets and, most probably, of the world economy itself.
The most widely cited and by now broadly recognized change is the US ‘energy revolution,’ led by hydraulic fracturing (‘fracking’) as well as the exploitation of tar sands. The advances are significant. Since 2007, rising domestic production has halved the price of natural gas for American consumers, in contrast to a doubling of the domestic price of gas in Western Europe. In the US, production of crude oil has risen over 40% in the past five years, making it the world’s second largest producer of petroleum and helping to narrow its energy import bill by a quarter since 2008.
New innovations supporting growth
As we noted in a recent publication, advances in information and communications technology as well as new innovations in manufacturing activity, together with rising energy production, could lift trend global GDP growth 0.5-0.7 percentage points in the coming decade. Global inflation could be one percentage point lower than it otherwise would be and global profits growth could be around 5% higher.
New innovations creating productivity
What are some of these changes? They include new technologies such as additive manufacturing (e.g., ‘3D printing’), advanced robotics, mobile technology, and cloud computing. The productivity gains and cost savings are potentially significant. For example, advanced robots could work 24/365, for as little as four dollars per hour. In addition, ‘3D printers’ could remove 90% of the waste from some manufacturing processes and save more than 50% from production-related energy bills.
An ascendent America
The US economy and the US dollar will probably be beneficiaries of these structural transformations. That’s because of the US’ favorable cyclical position, superior access to debt and equity capital, as well as a comparative advantage in the production of new technology. Accordingly, the US dollar will benefit from capital inflows seeking high returns from innovation. Equally, the dollar ought to be supported by the structural improvement in the US current account balance as energy imports fall, owing to increased domestic production.
In summary, it is human nature to project the present (and near past) into the future. Often, that’s appropriate. However, there are reasons to believe that the world economy is changing in profound ways. A prolonged and painful era of advanced economic malaise juxtaposed by emerging economy euphoria is, as our teenagers might say, ‘so yesterday’. New challenges lie ahead, but so too does much promise, including a revitalized world economy, led by an ascendent America.
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