Who in their right mind would think that the Far East is in economic decline? It is the region of the world where any sane investor would be looking to invest their funds. China recently announced its expectations of growth for the coming period of 7.5 percent – a pullback from previous years but way ahead of what the Western world is experiencing and expecting over the next few years. So what factors affect economic growth?
The last few years have shown that growth in the levels of debt – government, personal and bank – have had a very significant effect on a given country’s growth. Consumer consumption can be a very important driver but when it is fuelled by cheap credit and the cheaper credit is stopped, consumer generated growth will dry up too.
Governments attempt to fuel growth by increasing the amounts they spend on investment and government services. However, they have to be able to maintain their credibility to keep on borrowing from international markets if expenditure exceeds income. As we have seen, a number of countries have lost economic credibility and as such lost access to third-party funds.
These countries have been forced to introduce austerity measures which in most cases will reduce growth in the short to medium term. Those who address the problem early, such as Ireland, will emerge and start growing again quicker than those who put their head in the sand, such as Greece, which ended up exacerbating the problem so that it will last so much longer.
Ultimately though, it seems that a bank debt crisis has the greatest effect on economic growth and sadly we are in one of those at the moment. A lot of the growth in the first part of this century was fuelled by bank debt which has since gone bad. This means that the banks’ balance sheets become weak and as such the banks stop lending until they have improved the strength of their balance sheet. This means that companies and consumers have less access to funds and as such are unable to expand, which in turn reduces growth.
The maturity of a country can have a major effect on a country’s growth. Could China continue to grow at 7.5 percent per annum if it had the same industrial history as the UK? Clearly not – and the reverse is true in that the UK’s growth is always going to be constrained in its ability to grow at a high rate as its industrial base is already substantial.
What is interesting in China is that its growth has been fuelled by exports and the cheapness of its products due to low labour costs and the buying binge of these products made possible by cheap credit in the Western world.
With the recession in the West, Chinese growth needs to be maintained by its own consumers and by government spend. Chinese consumption is growing but it is government expenditure that is the major influencer at this moment in time. But you do wonder how motorways to nowhere can be built. However, I am confident that the Chinese economy will continue to grow significantly over the next few years, even decades just given the sheer inventiveness and drive of the Chinese people and the need to keep their huge workforce employed.
So what will cause this growth in China and other Far East countries to decline?
Population growth or the lack of it is put forward as the key factor. Given China’s one child per couple policy, the expectation is that the population will start to decline over the next two decades and population growth is a major factor in driving economic growth. As noted, consumer consumption is a key ingredient for an economy and the more people, the more they will consume. Also, the age demographics will change as the average age of the population will also go up reducing consumer expenditure.
So where in the world will enjoy growth? India is an obvious choice where the population continues to grow and where the age spread is very much to the lower end of the average. Turkey is similar with a young and growing population making it a place likely to see increasing economic activity for quite a long time.
So what of the UK, the USA and Europe? Strangely – and certainly not obvious to me at first – is that the UK and the USA are expected to see growing populations. I thought that we had an ageing population less likely to have children and therefore in decline? However, it appears that immigration from primarily Eastern Europe of a younger generation is having a positive effect here in the UK. Similarly, in the USA immigration from South America is changing the dynamics. Europe on the other hand has a declining economy and subsequently, growth could be curtailed.
In the short to medium term, the Far East will continue to grow. In the longer term, it seems that there are better places to be – even though it is difficult for most of us to believe that this is the UK.
Charles Purdy is MD at SmartCurrency Exchange and a European economic commentator