U.S. Will Need to Lead the World Out of Soft Patch
The sheer size and consumer orientation of the U.S. economy will be a big swing factor in the export and growth trajectories of other countries, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
We've seen ups and downs in the world economies in recent times, but Morningstar's Bob Johnson, our director of economic analysis, says to keep your eye on the U.S. as a big swing factor in the health of the world economy; it might lead us out of the world's soft patch. He is here to explain why.
Thanks for joining us, Bob.
Bob Johnson: Great to be here.
Stipp: Let's talk first about why [you should] keep your eye on the U.S. We've seen decent, consistent, but not really strong growth in the U.S. So why is the U.S. going to be a big swing factor here?
Johnson: It's a big swing factor just because of its sheer size. It's about 25% of the world economy, which would make it the biggest country by far of all the major countries. Even [if] you put Europe in there as a block, it's about the same size as the U.S. So it's certainly a big size component.
And on top of that, it's a big consuming market. A lot of economies out there, like China's, are big, but their internal consumption isn't very high; they don't drive the world economy. The U.S. is the world's largest economy, twice as big as China is, but consumption is probably [once] again as big, because … they spend less on consumption. That's probably the number one factor for why the U.S. is important.
Stipp: If we're feeling a little bit healthier, we're consuming more, and that helps the export economies of other countries.
Stipp: Let's talk about one of those biggest countries that exports a lot to us, China. China has been under a lot of scrutiny recently, and you don't see [China] as being a big swing factor on the upside.
Johnson: No. They've actually been a little weak recently; this is the slowest growth rate we've seen out of China since 1990. That's a long stretch, since they've begun on this whole reform movement, that's 23 years, and they'll probably grow about 7.5% instead of the 10%-12% they did in boom times. They've clearly backed off, and a lot of that, frankly, is intentional. They're trying to shift [the economy] from an entirely investment-driven, export-driven economy into a more internal-consumption economy. In the process, it's slowed things down a little bit.
Stipp: You also say that it's difficult to really get a [read] on China's debt situation. There is some opaque data there.
Johnson: It is hard, because of the local lending facilities and the government's ability to force people to lend. It's very easy to get a loan if you're a state enterprise, not so much if you're a small business. So there are a lot of things that are tight. And believe it or not, … their debt ratios are really very high. They're approaching 200% of GDP. Those are certainly not the type of numbers where they've got a perfectly pristine balance sheet. That's something to keep in mind.
Then also investments. We had mentioned before [China is] trying to shift from … building roads and airports, where you can just use brute force to say we're doing this, to more consumption, where it's more [driven by] what people think, do the consumers feel well enough to go out and spend money. That's a big shift for an economy where 49% of their GDP is investment--49%.
Stipp: If China is undergoing a big change in the composure of their economy, there could be some bumpiness, and that could also have knock-on effects in other emerging markets.
Johnson: Exactly, because China is this giant funnel. They take all the inputs from all the other emerging markets--and also commodities-based economies like Australia and Brazil, which aren't emerging economies, certainly--but they take things from a lot of other economies, Korea and other places like Japan, that are nearby neighbors. They take a lot of demand from those countries. So as China slows, those other emerging markets slow, and we've certainly seen that.
Then worldwide we've seen [a slowdown in] anything related to commodities, because certainly with the investment boom [China was] using a lot of cement, a lot of steel, a lot of copper, and that meant a lot of commodities from a lot of other economies that we probably call emerging economies, and some that aren't so emerging.
Stipp: You also mentioned that we need to keep our eye on some inflation and currency issues in emerging markets. What's the trouble spot there?
Johnson: The emerging markets have all had a bad run on their currencies recently. One of the knock-on effects and unintended consequences of the United States Federal Reserve's easing programs has been that it did create a certain flow of easy money, and some of that easy money found its way into these emerging economies. Some of it was just money seeking yield. With yields near zero here [in the U.S.], you get a decent yield in an emerging market, plus maybe even a little growth. So people were very excited about it, invested a lot of money in emerging markets, and now with the Fed tapering and rates here going up well over a percent in a very short period of time, some of that money is getting withdrawn out of those markets. As those monies get withdrawn, that has the effect of lowering their currencies. Then that means that their imports, primarily oil, cost a lot more, and that starts inflation in those countries. And that begins to slow growth in those countries. And India is the real poster child for all of that. Their currency is at a record new low.
Stipp: Let's swing over to talk about Europe. You say that Europe is doing better, but it's certainly nowhere near being out of the woods yet.
Johnson: I want to emphasize they are doing better. I don't want to belittle the improvement, because it's hard-earned. They've been in a double-dip part of the recession since 2011, and they've had their first quarter now where we had positive GDP growth since 2011. That was good news. It was driven by France and Germany, which certainly have been better economies all along, but also things were less bad in some of the periphery parts of Europe. … Some of the production numbers were up; confidence seems to be up; the numbers for Germany seem to be particularly good.
But we're not out of the woods in Europe yet. I don't think we're going to go immediately back into another recession, but it's not going to be the huge driver like the U.S. economy can be, because it's not as [much of a] consumption-oriented economy.
On top of it, we've got some fundamental problems in Europe as well. They haven't fixed their banking system yet, and it's very, very hard--if not impossible--to get a small-business loan in Europe. That makes it extremely difficult to grow their way out of this situation.
Then we've still got the sovereign debt issues, and Greece is in the headlines again today talking about the German elections coming up, and they're talking about Greece because, what should we do about it. They're saying, no more debt haircuts on Greece. But at the same time they are admitting that Greece can't repay all those debts, which begin to become due as early as 2014.
Stipp: What about Japan? They've enacted some big reforms. Their market has been bumpy, but it was up big in recent times based on the really tremendous stimulus they're doing. But you're saying that some of the changes they're making haven't gone actually far enough in some ways.
Johnson: It's the same thing that as we are seeing in Europe. The money is a little bit easier, the spending is getting a little bit better, but underneath the fundamentals, the things that were causing the problem still haven't been fixed.
In the case of Japan, there is a lot of regulatory reform and certain large companies being advantaged and certain ways of companies being structured that they've always done that just haven't been cleaned up yet. Until those get cleaned up, all the cheap money in the world isn't going to help forever.
Stipp: If we're saying that the U.S., given some of the pressures in the other parts of the world, is going to be the economy that helps to pull us all out of somewhat of a soft patch, what's going to drive it in the U.S.? I don't think you're expecting the U.S. to have accelerating growth or gangbusters growth. But what will help us, help the U.S. economy, and then in turn help the world?
Johnson: I hope [GDP is] a little better in the second half than the first, and then probably more of the same 2%-2.5% growth next year. You're right, no stunning acceleration, but better in the second half than the first, certainly.
I think there are a few things--the tailwinds that we've always talked about in the U.S. economy. We've got a housing market here, because we've got more available land, most of the time, to build on, and that certainly gives us an edge that a lot of other economies don't have to step up growth a little bit.
The oil and gas development here has been a big deal that almost none of the other economies are able to take advantage of; nobody has been able to pull off what we have in shale oil and gas production, and certainly that's a big plus.
Boeing and the airline industry is a big deal here, and we've talked about the auto industry here being in better shape than most other industries in the world. Plus our banking system is kind of fixed. Our budget deficit isn't yet, but I think we're getting there. I think the deficit numbers as they stand right now are looking a heck of a lot better than they did. We still have the congressional [battles] coming up, where they have to vote on the budget for next year shortly, which they haven't even done yet.
Stipp: A great global perspective, Bob. Looks like all the spotlights will be on the U.S. coming up in the next few years. Thanks for joining us.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.