US Lands-World Soars

Written By Brian Hicks

Posted December 5, 2006

Two reports issued in recent weeks highlight the role that international markets play in moderating declining American economic growth.

As the US lowers its soft landing gear and dials down expectations for GDP numbers, regions as diverse as Africa and Asia will combine to ensure a healthy trajectory for the overall global picture.

The Organization for Economic Cooperation and Development issued its newest economic outlook on November 28. As the world’s leading body for economic evaluation in industrialized economies, the OECD is perhaps the best arbiter of quantitative and qualitative health in developed markets.

The 30-country OECD may be facing a "rebalancing" of economic growth across its regions, according to chief economist Jean-Philippe Cotis. There are, of course, more than 30 countries in the world, but since most of the money passes through OECD members’ central banks and consumer distribution byways, Cotis’s birds-eye view of member states provides a sound basis for extrapolation.

Primarily, increased activity in Europe and East Asia (excluding Japan) will pick up the slack for a slowdown in the US. German business confidence, for example, rallied to an unanticipated 15-year high in late November. Increased positivity on the part of businesspeople means more deals executed and more money exchanged.

More money moving around also means that central banks (in this case the European Central Bank) will do their part to rein in the inflation that normally stems from augmented monetary supply. European policy makers have confirmed that they will indeed push interest rates higher in 2007, which in turn makes the euro more attractive than the dollar in foreign exchange trading.

The OECD also revised its estimate for 2007 US GDP growth downward, from 3.1% to 2.4%.

A drop in US consumer confidence, meanwhile, is expected to trigger Federal Reserve rate cuts that would stimulate spending and increase the money supply. This further weakens the dollar’s attractiveness as a currency holding, but helps US-based exporters whose goods become cheaper as yen-, pound-, and euro-denominated goods cost more compared to the greenback.

Out of Poverty, Into the Middle Class

Another international authority, the World Bank, provides more validation of the economic weight shift now gaining steam. The Washington-based body expects East Asian economies to chalk up a fifth straight year of growth in 2007, lifting 25 million regional residents out of severe poverty in the process.

Since 2005, 1.5% of the East Asian population has moved up past the $2/day income threshold. While that is not exactly livin’ the good life, it is a sign of upward movement and further fodder for a budding middle class in countries like Vietnam and of course China.

The World Bank also says that the quality of growth is on the rise, with schooling and access to basic services gaining ground. The OECD adds to the qualitative picture, saying on December 4 that China is set to become the world’s number-two research and development (R&D) spender by the end of the current calendar year. That rockets the Middle Kingdom past Japan, putting it in second place just behind Uncle Sam.

R&D funding has been a major concern of those macroeconomic observers watching China’s lightning-fast 10% GDP growth, which until recently had seemed almost entirely dependent on overseas demand (read: cheap exports). A rise in research funding means that the country’s intrinsic capacity for growth will be bolstered, enabling advances in technology and customer service to advance in new markets like Africa and Southeast Asia.

Milan Brahmbatt, the author of the World Bank study, also says, "China has overtaken the US and Japan as a destination of East Asian exports," though much of that intra-regional trade consists of parts and components (like microprocessors) rather than finished products (like computers).

What China’s consumption has also done is catapult it into the world’s unfortunate elite of energy intensity. This means that for every percentage point of GDP increase that China racks up, its energy consumption increases by more than one percent. That is the definition of unsustainable growth, and it has driven China to seek far and wide to secure energy supply security while it cranks out coal for domestic power plants.

Don’t Forget Africa

Africa has become a primary target for China’s energy quest, with some of the world’s last virgin oil and gas reserves within the continental borders in countries like Libya and Angola. Yet Africa is conspicuously absent from the World Bank and OECD’s international economic recalibrations.

It shouldn’t be.

Africa is on the upswing, make no mistake about it. For one case in point, take a look at the continent’s mobile phone penetration. A study issued last year by the Centre for Economic Policy Research, a European economic study consortium, showed that an increase of 10 mobile phones per 100 people led to a 0.6% increase in per capita GDP.

A whopping 85% of small businesses in sub-Saharan Africa rely exclusively on mobile phones, according to the survey. So cell phone market growth correlates directly to overall economic growth, especially as the continent was the first region in the world where mobile phone subscribers outnumbered fixed-line users (this pattern began in 2001 in Africa and has accelerated since).

For many of these African consumers and businesspeople, their portable phone is the first phone they’ve ever had. This is a situation other regions have never seen, and so the growth this circumstance entails will be a unique beast. Call it the world’s first "Lion Market."

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