If the U.S. can confront its own fiscal problems, it stands the best chance of all the major economies for returning to trend growth and dynamism and that might be the best path to renewed strength for the world economy.
This is according to Cliff Waldman of the Manufacturers Alliance for Productivity and Innovation (MAPI) whose presentation, “A Chastened World, Bereft of Dynamism,” grabbed the attention of all at the recent VMA Finance Leaders Seminar, held April 25-26 in Arlington, VA.
Subpar growth persists in the U.S. partly due to the continuing recession and weakness through much of the Eurozone. A prime example is Greece, which remains an economy in crisis that could once again flare up as a regional risk. The situation in Cyprus is also a concern, says Waldman, and reflective of the landmines still plaguing the Euro landscape. “While globalization has brought many rewards, it also produces risks. We live in a world where instability in the Cyprus banking system creates global fears. Counter that, though, with the fact that the Cyprus crisis also illustrates the improved control that Euro policy makers have over general regional stability. Bond yields remained relatively docile in the wake of the crisis. That,” he said, “is a good sign.”
However, while strong policies from the European central bank have created a modest sense of stability in the Eurozone, the thorny questions of financial integration and governance will remain for years. More than anything, Waldman says, this region needs a growth plan, which is a huge challenge given the unfavorable demographics and uneven competitiveness across member countries.
Even away from the many brinks, the labor market data spotlight the degree of Eurozone weakness. Unemployment is reaching almost 12%, the highest since the Eurozone formed in 1999. “This is not a shallow, short recession in this 17-country zone,” said Waldman, “and manufacturing is feeling the effects. Even Germany, France and Spain, the stronger of the member nations, are starting to be pulled into the general Eurozone weakness. And that weakness has long tentacles, evidenced by signs of slowdown and recession in Central and Eastern Europe.”
Eastern Europe and Russia
Waldman believes that Poland could be a growing global force. The unemployment rate was over 20% in early 2000s, but it was the only country in the Eurozone that didn’t slow down during 2008 and 2009. “However,” he said, “Poland and the Czech Republic are being pulled down by gravitational force of the Eurozone. And Russia isn’t immune to this.”
Waldman was unenthusiastic about Russia’s economic health. Due partially to the Eurozone’s troubles, the country’s GDP has fallen and manufacturing has contracted. Russia was also seeing export growth from December 2009 to March 2012, but that has stalled along with manufacturing growth. “It could be a strong growth country, but it is not, and that is also partially due to poor management.”
The United Kingdom
In the U.K., while Waldman saw a bit of an economic surge due to the Olympics in 2012, and believes the new Prime Minister Cameron was impressive in his efforts, he doesn’t think the world was appreciative of Cameron’s position. “There is a weakness in domestic demand. I’m hoping this slide will be rectified by slowing currency growth, but the pound is not as low as I would like it to support manufacturing exports.”
Of course everyone has eyes on China, the world’s second largest economy. Waldman pointed out that China had to have a slowdown at some point; no country can keep up at 9% growth. “So it has slowed down, and it appears the slowdown has finished. While manufacturing data from China is questionable,” said Waldman, “it appears to have hit the bottom and come back up off it. Exports are getting to be a little more geographically broad, which is a good sign this is a real revival. The new leadership, which seems bent on balancing the Chinese economy, is something we have to keep an eye on. But generally I see a slowdown with a slight uptick.”
In the rest of East Asia, there is continued growth, especially in Indonesia, a country Waldman feels is very promising. Malaysia he considers a very cost-effective country. “South Korea was looking stronger, but how can we trust anything when they have a crazy person pointing a nuclear weapon at them?” queried Waldman.
Japan has been in some form of crisis for the last 10 to 15 years. “They didn’t solve the banking crisis of 2008 and 2009, then the tsunami hit in 2011,” said Waldman. “They came out of that faster than we expected, which is a very good thing. But most importantly going forward is a paradigm change they are making. If something hasn’t been working for 15 years, then change it. They’re beginning to get that.
“They are also dealing with persistent deflation,” he said. “The problem is that people won’t buy now because they know that next year it’s going to be cheaper. Why start a business? Plus, there is lots of anger over how things were handled after the tsunami. This confluence of events has created a true ‘shock and awe’ change. But it will be a good thing, though it is hard to get out of deflationary mode.”
Waldman believes that over the short-term, the Bank of Japan will likely accelerate downward pressure on the yen, which he believes is positive for Japan’s economic outlook.
India, on the other hand, has the opposite problem to deflation. It has a very bad inflation problem. “Why is inflation rising to 12% when the economy is still sliding?” asked Waldman. “In the early 2000s, changes were made after their last crisis when the country almost went broke. They did well, but now they are starting to slip back. Part of the problem is leadership. They can’t make up their minds and there is a lot of graft and corruption. None of the current leaders have the vision of a Ghandi or Nehru. So its slowdown hasn’t really quite bottomed yet. Anyone with eye on India for manufacturing or R&D needs to look if the political class is going to get it together. It could either go forward or backward.”
Waldman said that Canada is a small country that has done a good job of de-regulating. “It looked good for a while and it had a fairly shallow recession from which it’s coming out. Unfortunately, Canada’s economic recovery is tied to the U.S. and global challenges. It really did not prepare adequately for globalization, and its export growth has been week.”
Waldman is predicting a rebound for Latin America, but not a strong one. He posed the question, “How long can Mexican economic growth remain moderate surrounded by U.S. and Brazil weakness?”
“Brazil gave me heart palpitations,” declared Waldman. “I’m so glad it didn’t go negative; that would have shut down Latin America! We are seeing some glimmers of light in manufacturing production. Inflation is around 7%, which is not bad for a developing country. Remember, in earlier years it was 40 to 50%. Depreciation in the currency should be helpful.”
Mexico surprised everyone. It experienced a bad recession and then pulled out of it. “But now Mexico is capitulating a little bit and manufacturing is declining,” said Waldman. “And it has to do something about getting border town violence under control. They say they can’t do anything about it, but they can. If they do that, they could become a manufacturing powerhouse in the long term.”
And in the United States…
"We're still stuck in low gear," said Waldman. "The above-trend surge of previous recoveries has been missing in the U.S., impacted in part by a weak world." But the slow growth of manufacturing has at least avoided contraction, and there are signs of life in the housing market. Increased affordability and a smaller inventory are finally putting upward pressure on prices, “so you look and can see a recovery, but very small. This is not a boom but certainly it’s the best news I’ve been able to bring to anyone in a while on this economy.”
Overall, the outlook for job growth remains slow and frustrating. Consumer spending has been constrained. There is still a lot of uncertainty, and what has been happening politically doesn’t help. Manufacturing employment growth has slowed in the face of global pressures. Waldman warned, “The unemployment rate has been a bad indicator to this economy. Long-term unemployment has been way higher than ever before, even compared to post WW2 standards. While we have a fall in unemployment because the economy is getting a little better and an aging population means that some people are leaving the workforce, it’s almost four years after the trough of the great recession and we are still seeing the effects. That’s why we need to keep talking about it.”
Waldman believes that our demographics, with the aging workforce, will almost assure that our fiscal problems will be challenging for years to come as the number of workers supporting the retirement-aged population continues to decline.
That said, amidst a steadier but still weak world, the U.S. outlook is modestly brighter. Waldman concluded his report on the U.S. economy with this caveat: Slow income growth, slow business formations, modest capital spending and the drag from continued fiscal adjustments will keep economic growth too tepid to allow for full employment anytime soon.
The world economy has taken a few steps back from the brink. The Eurozone remains the biggest risk and business decision makers cannot afford to be complacent about this troubled region, but the European Central Bank appears to have contained the most damaging forces of financial chaos and contagion.
Waldman believes that the worst of the emerging market slowdown is behind us, but these economies are now facing their own period of frustratingly weak and uncertain recoveries.
The past five years have produced a worldwide legacy of slow growth, fiscal challenges and high unemployment. All of these will be features of the global economic landscape for some time to come.