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On World Economy... - start of the American Decade, 2012

These are not quite the times to be speaking of economies or economics, leave alone that of the World. The weary aftermath of the great downturn of 2008-2010 followed by a series of aftershocks are still being felt across continents. The recent deceleration of the emerging markets, those that arguably bailed out the Globe during the dark days of 2009-2010, is another grim surprise. China, that looked invincible just a couple of years back, is stuck in a low growth phase. All the cockiness that was India just about 20 months ago has gone into quiet introspection. Brazil and Russia never made too much noise and hence are excused for the general slowdown that their economies are going through. Africa is probabaly the only exception. If anything, there is widespread realisation that the World is ever more inter-connected and the developed World needs the emerging one as much as the other.

It, therefore, takes great courage or utter foolishness to make a prediction going forward. Yours truly shall accept the latter case for himself and hazard a guess as to what will happen in the near future.

The World GDP is estimated at about US$ 60 Trillion at present. Of this the US plus China account for a third. Sectorally, services constitute about 62% of the World's GDP and a little over 30% is Industry with Agriculture accounting for the rest. Not surprisingly, the leaders of the Services sector are the US and UK. Leaders in industry are China and Japan.  

It is interesting to note that energy, part of the Industry sector pie, contributes close to 9% of total World GDP.

While the World is still obsessed with China with countries in the developed World far away from the radar screens of economists, it is my sense that everyone's missing the US of A. In fact, a close friend and a naturalised citizen of the US for some 20 years told me last week that US is the last place one should look, for opportunities. His vote was strongly for China followed by his country of birth, India. He went on to say how he and his fellow countrymen are working ever so hard, putting in over 80 hours a week at work and virtually trying to do more with less on people, money, and other resources. "Things look so hopeless here. India and China are the places to be, my friend". Another self-proclaimed "venture capitalist" and "business expert" friend of mine even said, "I wouldn't send even my enemies to the US at this time".

Have always felt that the so called "experts" call it with their "right brains" while they use their left lobes to do all their other work all day long!

Piecing together just a few numbers and the bits and pieces of other news items streaming in the past few weeks, there is overwhelming evidence to show that the US has slowly but surely started to move. Here are a few pieces of data that's important to consider......

1. The US is still the largest economy at over $16 Trillion and is expected to grow at over 2% annually for the next few years. Even at these speeds, we are talking of a huge momentum (Humans anyway can't figure out momentum as thy can mass and velocities, individually. They are not wired to do that, somehow).

2. The US has a healthy population and favourable demographics.

3. US corporates are sitting on a treasure trove of over $2 trillion in their balance sheets and are looking out for investing into emerging opportunities.

4. Entrepreneurial spirit and Innovation are alive and burning in the US even more today than anytime in history thanks to many things, not least the IT revolution of the past 2 decades.

5. US seems to be moving faster than any other country (like only it can) on cleaner energy and alternate sources of energy such as Shale gas. The US Government and its legislation is greatly enabling this development better than any other country in the World. The American entrepreneurial spirit is taking care of the rest. This promises to reduce energy costs for the US vis a vis other countries. Imagine what it can do to improve competitiveness of US businesses going forward.

6. US Housing sector is starting to show a turn-around and can quickly add jobs and thereby bring down the 8%-plus unemployment, a source of worry at present.

7. A major drain on the US economy is the ballooning health-care costs in the last decade and a half. There is a great chance that Obamacare will rein in these costs as it kicks in from end of this year. A change of Administration in the coming election may not matter as Obama's Republican opponent was the original author of a similar bill at the state level some years back.

8. American banks seem to have turned the corner since the days of the Great Downturn and look ever more healthier compared to banks In rest of the developed World, especially Europe and Japan.

The last point is very important as Services constitutes as much as 79% of the US economy. UK poses the strongest competition to the US in this sector but the recent scandals relating to LIBOR has greatly weakened the credibility of banks in the UK and the mess is just starting to unfold. This only means that the US banks and services sector are only going to become stronger in the near-term.

9. Another big contributor to US leadership is its traditional strategic depth and strength of its military-Industrial complex. It is no surprise that the engagements in the Iraq, Afpak theatres over the last two decades has made US stronger militarily. Why? US has learnt to fight a completely new type of war, i.e., one that is a slow, sustained and prolonged war, less fireworks but more on nerves and on the ground akin to guerrilla warfare. The innovation in weapons systems and armoury has kept pace to support this as well. Thus, what was seen as a clear weakness of the US Armed Forces in the early 90s has been greatly mitigated and converted into a huge strength. Remember, that the US was eminently prepared for a war with the USSR with its big guns and arsenal in the late 80s but was thoroughly lacking both in experience and confidence to take on even an Iraq on the ground in Desert Storm. Today, there is no such concern. While the mandatory Budget cuts may take its toll on Defence outlays come January 2013, it will not weaken America's strategic depth or its military might. slowly but surely, US will also find new markets for its new military wares.

10. The last point about Budget cuts brings us to the most important of reasons why the US is the one to bet on in the near future. The mandatory cuts will revitalise that Nation and its economy over the next few years by reducing the deficits and add to the 9 other pluses that have been listed above.

You may all bet on the horse called China (and some even India for sentimental reasons) but my money is squarely placed on good 'ol Uncle Sam in the coming 10 years.

Comments

  1. Sir ,
    How it is possible for China to be a fastest grow in Industrial zone, since the country is ruled by communist....(here communist are only the problem for the industries) ....shall we take they are growing bcoz of their attitude which is matching with japanese ....or the govt rule is like our gujarat of promoting the industries..... by Esakkisenthil

    ReplyDelete
  2. Hello Uncle, nice to catch you here. ;-)
    That is indeed a rather optimistic assessment of Uncle Sam, possibly one of the few going around. Let us see how things pan out.
    Oh and btw, a different font for the text would much improve readability.

    Cheers,
    Kaushik

    ReplyDelete

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