Richard Dunbar: Keeping a grip on power

Is the 21st century to be China’s century? Have the rigidities of the western economies in general and the United States in particular, and the error of their banks in the past few years relegated them to “also rans” in the new global economic order?

The US economy has undoubtedly had a tough few years. While it has been dealing with its problems, its nimble Asian and South American competitors have been catching up. The Bric (Brazil, Russia, India and China) economies now have their own economic summits, and the new upstarts have kicked down the doors of the G7, demanding a place at all the global economic top tables.

So, is the US to be consigned to the home for the economic elderly – to be visited occasionally by the young upstart economies who will be regaled with long, rambling tales of the “good old days” of the 20th century?

I don’t think so. I have great admiration for the Chinese economy and the potential of their people in the years ahead. I have also spent more time in China in the past five years than in the US, but I can’t help thinking back to the last time that the consensus wrote off the US economy. That time, they were proved very wrong.

In the late 1980s, the US was suffering the ravages of a mismanaged banking sector. It had a huge budget deficit; it was in the midst of a Middle Eastern war, and unemployment was soaring. Sounds familiar, doesn’t it? At the time, many pundits turned their attention to the booming Japanese economy, confidently predicting the demise of the West and the rise of the East.

At the time, it was certainly difficult to see a way out for he indebted West. But there was a way out – one that was flagged up by then US president Ronald Reagan in the mid-1980s. When he was asked: “Are you worried about the deficit?”, the Gipper replied: “No. It is big enough to take care of itself.” And sure enough, in the 1990s the US delivered its best economic performance for three decades – surpassing even the boom years of the 1960s.

Arguably, the US was fortunate in that this period saw the start of imported deflation from Asia. That phenomenon allowed easy access to money, and ensured inflation rates that surprised most economists.

The Clinton administration ran a fairly tight economic ship, and the US also reaped the benefits of globalisation, de-regulation and innovation (particularly in technology). Few of these benefits were anticipated by those gloomy commentators back in the 1980s that forecast the decline and fall of the US in the 1990s. But the net result was that the economic superpower was back on track. The question is: can America pull it off again?

The green shoots are already appearing. The fourth quarter GDP figure showed annualised growth of 3.2 per cent. This gave growth for calendar year 2011 of 2.9 per cent, the strongest rate of growth since 2005. Credit demand appears to be growing – and despite the travails of the banks, supply is rising to meet it.

In November and December, we witnessed the highest two-month surge in debt levels since 2001. Given that it was too much debt that got the western world into difficulties in the first place, this may not be unequivocally positive. But credit lubricates the wheels of our economic system, and it looks like there is more of it about in the US.

Closely related to this demand for – and availability of – credit is the state of the US housing market. Home sales rose more than 4 per cent in January 2012. There are tentative signs that prices may have found a level where buyers and sellers are happy to contract. Affordability is attractive and first-time buyers now represent a third of the market. This recovery looks increasingly well-founded.

The recovery in the housing market also has implications for a traditional US competitive advantage – labour mobility. The inability to buy and sell houses had been hampering US citizens’ ability to move to where the jobs are.

The average relocation rate (the percentage of job seekers relocating) in 1990 was 30.5 per cent. By last year this rate had fallen to 7.3 per cent – doubtless due to the moribund housing market. It is reasonable to expect any recovery in housing to have very significant effects on the dynamism of the US economy.

While both government and consumer spending are still in financial recovery mode, the corporate sector is in rude health. US companies have more than $1 trillion in cash on their balance sheets, a figure that is up more than 60 per cent from five years ago. Of course, this may not find its way into productive investment – but it certainly gives the US corporate sector an enviable range of choices.

Two longer-term factors should also be thrown into the US mix. First, while the environmental debate rages, the US is sitting on top of a decade’s worth of energy in the form of shale gas. This fact – one that most economists are just starting to get their heads around – will have material long-term implications for both US and global growth.

Second, US demographics look very attractive relative to most of its global economic competitors. Lately, a slowdown in births and illegal immigration – probably due to the economic downturn –had slowed population growth. But this follows decades of immigration and increasing fertility – the net result being that the median age in the US will be 30-38 years compared with the 52 years in Europe, 45 in China and 53 in Japan. Demographics is a complex and multi-faceted area, but it extends the potential to offer the US economy significant competitive advantage over its competitors in the decades ahead.

No doubt we will continue to debate the outlook for the global economy and the balance of economic power between East and West. The “China’s century” theme is likely to crop up again and again. But we should be careful not to write off the US. In the short term, it has picked itself up and dusted itself down from the recent crisis and appears to be on the front foot once more. I expect the near-term economic figures to reflect this. If they do, there are considerable implications for many economies and companies elsewhere in the world.

And in the longer term, bear in mind the considerable advantages that accrue to the US economy.

As I have already indicated, I am as excited as anyone about the prospects for the East. But it could very well prove expensive to bet against the perennial US presidential quote that “America’s best days lie ahead”.

• Richard Dunbar is investment director – UK Equities, at Scottish Widows Investment partnership