WEBVTT

NOTE The Outlook for the World Economy

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Last year, the world economy grew by 5%, which was the fastest for many years, and as usual, China and other emerging economies had the highest growth.

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America and Japan also had fairly strong growth, while Europe, as usual, had a more dismal performance.

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Now, this boom was driven by both positive and negative factors.

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Positive factors include increased trade liberalization, which has increased world trade, which in turn has helped deepen the division of labor and thereby increase economic efficiency.

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Also, free market reforms in China and many other emerging economies have driven growth there.

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But there have also been negative factors. The most important one is of course the cheap

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money policy by the Federal Reserve, which have created a great imbalance in the world

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economy. In particular in America, of course, where the debt levels have reached excessive

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levels and savings have been driven too low, but it has also created problems in other

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parts of the world. For example, it has created an excess dependence upon net exports to America

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and also it has, because of the downward pressure on the dollar that the low interest rates

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in America have created, it has also meant that other central banks have emulated the

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in order to prevent their currency from rising against the dollar.

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Also another negative factor is the great structural problems in Europe and Japan.

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I'll return to that later.

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To better understand this issue, I shall in more detail describe the strengths and weaknesses

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of the four main economic powerhouses of the world.

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of the World, the United States, European Union, Japan and China, beginning with America.

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The great strength of the U.S. economy is that it's still one of the most market-oriented

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economies in the world, despite everything it has still a relatively low level of government

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government spending compared to other major economies.

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As you can see, only China has a lower level of government spending among major economies.

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And it is because of this factor that America has been able to outperform both Europe and

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Japan during the latest decade.

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But there are also, of course, problems in the American economy.

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And the most important one is, of course, it's over-dependence of un-cheap credit.

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If you remember, five years ago, the US had its largest stock market bubble since the 1920s,

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with particularly technology stocks being set at ridiculously high levels. This bubble

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was ruined by rapid money supply growth and was accompanied by a sharp increase in private

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Depth Burden and the Current Account Deficit, both of whom reach new record levels.

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And one interesting indicator is this, the U.S. private sector financial savings rate,

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which is the difference between savings and investment in the private sector in America.

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Usually it fluctuates in a counter-cyclical way, being very high during recessions, because

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at that time, households and businesses are trying to restore their balance sheets while

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being fairly low during booms. But during the, until the late 1990s, it's usually fluctuated

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between roughly plus 5% of GDP during recessions and around zero during booms. Yes. But during

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In late 1990s, it dropped to unprecedented low levels at almost minus 6% of yearly fee.

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And then when the bubble bursted in the spring of 2000, we could, with that background, have

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expected a quite sharp recession. But in fact, the recession that followed was quite mild.

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And the disavoidance of a severe recession was achieved by the combination of both combined

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tax cuts and spending increases, and the fastest and largest interest rate cuts in American

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history, with real interest rates being pushed into negative territory for the first time

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since the 1970s. But this avoidance of a deep recession came at the price of preserving

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the imbalance that created the 2001 recession in the first place. The end of the stock market

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bubble was followed by the creation of another bubble, this time in housing. And while normally

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Generally during recessions, the private sector death burn falls and household and corporate

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balance sheets are restored through high net savings.

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This time, the household spending spree, in fact, was aggravated during the last few years.

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While the corporate balance sheets have been largely restored, both because of high profit levels and historically low levels of business investments, as I said, households have been on a great spending spree fueled by the housing bubble.

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And as you can see here, the total current account deficit has reached record levels now.

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This means that the imbalances are on the whole, still on place.

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This means that there is a great risk for another crisis sometimes in the future.

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When that will come is of course impossible to say.

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But in more general terms we can say that it will come when the foundation of the current boom is removed,

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which is when real interest rates return to higher levels and or when confidence falls sharply.

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Moreover, I can say that it is very unlikely that any recession will come during the coming year.

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The reason for that is displayed here.

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You see, the corporate profits are at very high levels while the business investments are still not really that high,

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which means that there's a great potential for continuing the boom in business investments

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and Business Investments, which have been in place during the latest year.

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There's more than 10% increase in business investments.

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Turning now to Europe.

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Europe has for the latest decades or so,

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laid behind America and most other countries in growth,

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or at least the European Union as a whole.

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and a few countries like Ireland and Luxembourg, as you can see there, which have had extraordinarily fast growth.

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But because Germany, France and Italy, the three most important economies in the Eurozone, have had such a dismal growth, the Eurozone as a whole has also had quite dismal growth.

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Now, before I describe the reasons behind this weak development, I should first refute a NIF about why these weaknesses have occurred.

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That is that Europe's economic problems are caused by an excessively tight monetary policy by the European Central Bank.

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This NIF is repeatedly brought forward by politicians in various countries and by the European business press,

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and business press, including The Economist and Financial Times.

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An American supply-side economist, Larry Kudlow,

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even went so far as to accuse the ECB

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of pursuing a, and I quote,

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scorched-earth deflationary monetary policy.

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The truth on this matter is displayed here.

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During the latest year, the Eurozone have had

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negative real short-term interest rates,

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2.4% consumer price inflation,

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6.4% money supply growth and nearly 7% privacy to debt growth.

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That is hardly what one would characterize

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as scorched-earth deflationary monetary policy.

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Now, the source of this myth seems to be

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the false allegation of weak growth

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is the result of an excessively tight monetary policy.

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Europe has had weak growth.

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Therefore, Europe must have had

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an excessively tight monetary policy.

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But as the first premise is false, though,

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And there is the conclusion, instead the reason behind Europe's weak growth is in part, the facts displayed here, that the burden of government is much higher than in the rest of the world, in countries like France, Germany and Italy.

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Moreover, the regulatory burden is much higher

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in these countries than in America.

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Another factor which have been dragging down Europe's growth

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has been its rapidly aging population.

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Europe has the oldest population in the world

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except for Japan and it also has the,

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among the lowest average retirement ages.

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In countries like France, Germany, Italy, the average retirement age is something near 55 to 60, and this has meant that already in countries like Italy and Germany, the labor supply has been falling, while the old age retirees have been rapidly growing in numbers.

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This is very bad for growth, partly because it creates a high fiscal burden, which drives

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up taxes and or government borrowing and also because the supply of labor falls and because

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Because as the old age retirees are in effect consuming without producing, this means that

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they drag down overall national savings. And it's, Germany, Italy, who has had the weakest

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growth during the latest decade, also have the oldest population and there is some causal

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between these two facts and this problem is likely to get worse with time some

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population forecasters believe that the median age in the country like Italy

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will rise to 55 in the year 2050 if the average retirement age is not

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raised by then this will mean that half the population will be old age retirees

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and since many in the working age population

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is also not working, it means that a well simply

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unbelievably great providement burden for those who work.

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Now because of these factors, the outlook for Europe

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is quite negative unless something radical

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is done to address these problems.

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and unfortunately I won't count on that happening.

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Moreover, if America, in the medium term,

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as I believe it faces a sharp recession,

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this will also be very bad for Europe

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as they have largely depended,

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the little growth they had have been exports to America

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and if America goes into recession,

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and even this positive factor will be removed.

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Turning now to Japan.

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Japan was for long the rising star of the world economy,

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as you can see there.

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Greatly outperformed the rest of the world.

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But since then, growth has fallen dramatically.

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There are basically three reasons for this.

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One is the hangover from the great financial bubble

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during the late 1980s, which created great malinvestments

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who have not been liquidated

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because of the short-term pain that would mean.

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But instead, it has meant that Japan has had

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a seemingly permanent stagnation.

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Moreover, the inflexible structures of the Japanese economy

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have also contributed to renting the reallocation of resources which would restore growth there.

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One positive factor for Japan is, however, the rise of China. The short-lived recovery

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that Japan had last year was because of sharply increased exports to China. And since, as

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And since, as I will talk about more later,

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China has a quite good outlook.

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This means that Japan will also in the future

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be able to benefit from that.

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Although it should be said that in the latest month,

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the great credit restrictions from the Chinese government

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have meant sharply decreased growth

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in Japanese exports to China.

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The third reason is that Japan has the same demographic problem that Europe has, in fact perhaps even worse in the sense of having an even older population.

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But on the other hand, since Japan has a higher average retirement age, this old population hasn't meant as great a burden as Europe.

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But since the labor force has already started to shrink, it has, in the latest year, contributed to Japan's sluggish growth.

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And as we can see here, with the likely development of Japan's working age population derived from comparing the population in the current age group of 0 to 19 to 45 to 64,

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Well, the Japanese working-age population is likely to decline during the coming due decades.

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Turning now to China.

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China was for a long time ravaged by, for example, British and Japanese imperialists,

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by a destructive civil war and, of course, 30 years of Mao Zedong's brand of communism.

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But since Deng Xiaoping introduced free market reforms there, China has had the fastest growth in the world.

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And there's every reason to believe that China will continue its extraordinary growth rate for at least a few decades.

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With SXD here, China has an almost ideal climate for growth, with no welfare state, no labor unions, an extremely high savings rate, probably highest in the world, and a seemingly endless supply of cheap labor.

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While estimates of the number of farmers in China vary somewhat, it accounts for at least half of China's 1.3 billion people.

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And if the relative size of the agriculture sector

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falls to Western level, that is like three or four percent

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of the population, this would mean that 600 million people

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would be moving from the low productive agriculture sector

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to the much more productive manufacturing

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and the service sectors.

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And that will of course have a very great impact on the world economy. Combine that with the fact that China has a much higher natural savings rate than other major economies that we can see here.

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And there's every reason to believe that China has a strong long-term outlook.

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But of course, there are dangerous areas for China too.

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There are, of course, risks for potential social unrest, growing inequality, and the fact that there are tens of millions of people moving around the cities

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If something around the city is looking for jobs,

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if somehow the job market were to dry up in China,

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this could cause social unrest.

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Moreover, China's banking system is almost infinitely fragile.

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And China also has a great over-dependence on exports to America.

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As you can see here, China has a much larger dependence on exports to America

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and other large economies, and of course there's also

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potentially a risk of war due to the problem of Taiwan,

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which would be very bad, of course.

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Well, all of this means that China has a very good outlook

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as long as they avoid any of these problems,

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and at least with most of these problems,

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even then it would probably only mean a temporary setback.

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Summing it all up then, short term outlooks are mostly good

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even though Europe will be,

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and Japan will drag down overall performance

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and although the economic imbalance

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are likely to be aggravated.

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The medium outlook contains the risk of an economic downturn in America which was spread throughout the world.

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The long-term outlook is mixed with China likely to increase in importance and Europe and Japan is likely to decrease in importance unless radical reforms are undertaken.