Remember when the Japanese were poised to take over the world and America was said to be going the way of England (a glorious past with no future)?
Then the Japanese economy imploded. Then came the Lost Decade. Then a second Lost Decade, as the ossified Japanese system of interlocked business and government refused to change, even in the throes of relentless stagnation.
Some of us are old enough to remember the start of that remarkable epoch and can hear the echoes playing over again with respect to China — and the other lettered nations of the BRIC. But the supposed inevitability of U.S. decline is especially hitched to China in the minds of doomsayers.
China is eating our lunch, right? It — and Brazil, India and Russia — is the future and we’re the past.
Oh, phooey.
Brazil’s GDP expanded by a trifling 1 percent in 2012. Russia’s growth this year is forecast to be no higher than 3 percent. India’s growth rate has slowed from 9 percent to 5 percent.
I know what you’re thinking: The United States would fly balloons if we could get back to a 5 percent growth rate. Sure we would. But a 5 percent growth rate isn’t squat when your per capita income is $1,500, as is the case in India. Ditto for China and it’s $6,500 per capita income and its forecasted 7 percent growth rate.
Apply a 7 percent growth rate to U.S. per capita income of $45,000 and you’re talking real money, a jump to $48,150 in just the first year. Spread that compounded 7 percent growth rate over 10 years and per capita income rockets to $88,500. Yet that same growth rate and duration earns China per capita income of just $12,800. India’s current 5 percent growth rate extended over 10 years takes its per capita income from $1,500 to just $2,450.
Chump change!
Ruchir Sharma, head of Morgan Stanley’s Global Emerging Markets Equity team, has it right in his new book Breakout Nations. A 5 percent growth rate “feels like a recession” when your per capita income is only $1,500.
Then there’s the backdrop to China’s growth situation, which is downright scary. As Jack Rodman of Crosswater Realty Advisors wrote in the May 2013 edition of The Institutional Real Estate Letter – Americas in an article titled “Yen again, yet again”, the Chinese are following many of the same policies that drove the Japanese economy into the East China Sea.
Sharma would concur. He points to the unsustainable debt China is incurring to keep its growth from declining to less than 7 percent. Until 2007, China invested roughly $1 of debt to stimulate $1 of GDP growth. During the past five years, though, the ratio has tipped to $3 of debt to generate $1 of growth.
Total debt in China has reached 200 percent of GDP. Granted, U.S. debt is much larger at 350 percent of GDP, but with U.S. per capita income many-fold that of China, our capacity to retire that debt load is a far more plausible proposition than China.
While doomsayers decry trends showing the percentage of global GDP accounted for by the United States, Europe and Japan declining during the past 25 years, Sharma cites statistics that show the U.S. share has stabilized while the European and Japanese shares are still declining. And for the first time since 2003, the U.S. economy has grown at the same pace as the global average. Sharma says this is due in part to declining global performance among the much-vaunted emerging markets, whose collective growth rate has slumped from 7.5 percent in 2007 to about 4.5 percent in 2012.
Yet again, the United States is proving a remarkably resilient economic force.
Or, as Sharma puts it, “The U.S. increasingly looks like the best house in a bad neighborhood.”
Mike Consol is editor of The Institutional Real Estate Letter – Americas.
