Travelling in the US this week reminded me how fundamentally resilient and competitive its economy is. Washington did not show any signs of recession, with the perfect blend of cool summer evenings and young students and old tourists wandering around.
The IMD world competitiveness rankings revealed that the US is once again No 1, followed by Switzerland and Hong Kong. Asia-Pacific economies performed well, with 10 in the top 30.
Taking a 15-year comparison, the IMD rankings showed that the winners since 1997 are China, Germany, Israel, Korea, Mexico, Poland, Sweden, Switzerland and Taiwan. These gained five places or more in the rankings.
How strongly is the US economy recovering? Opinions seem divided. US Federal Reserve chairman Ben Bernanke’s testimony to Congress last month suggested that the recovery is on track, with gross domestic product growth of 2.5 per cent in the first quarter this year, compared with 1.75 per cent during 2012. The unemployment rate of 7.5 per cent in April was 0.5 percentage points lower than last summer. Consumer inflation has come down to 1 per cent in the year to March, although the consensus on long-term inflation seems to be in the 2 per cent range.
The good news so far is that the housing market is improving. The latest flow of funds data suggests that the net worth of households and the nonfinancial business sector improved fairly strongly in 2012 and 2011, on the back of improved housing affordability and a stock market recovery, as a result of quantitative easing.
The biggest headwinds against the US economy are the weak export market to Europe and the large fiscal overhang. State governments have increased local taxes and cut state spending. In the past four years, they have cut 700,000 jobs. The fiscal austerity drive is beginning to bite, with the Congressional Budget Office estimating that the budget deficit laws would cut GDP growth by 1.5 percentage points this year.
This was why Bernanke felt that with short-term interest rates already close to zero, “monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”
The real strength of the US economy is that it remains the largest and most technologically powerful in the world, with cutting-edge superiority in creative science, computers, medicine, aerospace, military equipment, and superior research and development skills in top universities and research institutes.
It is also a market-oriented economy, with US companies accounting for 132 out of the Fortune Global 500 companies, and four out of the global top 10 companies by revenue.
The game changer for US competitiveness is not just the revolution in technology, but also the rise of shale oil. Improvements in the fracking technology to extract oil and gas out of shale, developed mostly by the private sector, threaten to change the global energy landscape. With this technology, and the high level of shale oil resources in the US and Canada, North America would become not only self-sufficient in energy production, but also a net energy exporter.
Oil prices are already under pressure because Iraq is beginning to revitalise production.
Despite the retreat from the use of nuclear energy, the latest International Energy Agency report, published last November, suggested that the world energy outlook will change dramatically in the face of improvements in efficiency, continued growth in the use of solar and wind power, and unconventional gas production.
By 2017, the US is projected to become that largest global oil producer, overtaking Saudi Arabia, and together with improvements in transport energy use, the US would become a net oil exporter by 2030.
This will have a profound impact on US competitiveness and the geopolitical situation. First, the US can either choose to tax the newfound energy source to reduce its fiscal debt or use the lower energy prices to boost its competitiveness.
By comparison, China, India and the Middle East would account for over 60 per cent of the increase in energy demand. This means Chinese and Indian enterprises would continue to have higher energy costs than US companies, despite cheaper labour costs. Even cheap labour costs are no longer a real advantage with the rise of robotics and 3D printing, which will enable home production instead of relying on imports.
The real upside for the US is that it can be much more hands-off in the Middle East political quagmire, whereas the energy-dependent countries like China, India and Japan would be more affected by the region’s politics. Hence, if a stable and strong country like Turkey can also get into turmoil, the game change could be much more profound.
Despite its many internal challenges, the US remains a haven of political stability in an increasingly turbulent world.
This article first appeared in South China Morning Post on 8 June, 2013