Why US economy will continue to lead the competition
Andrew Sheng says US energy revolution will be a game changer, with a deep impact on geopolitics
Travelling in the US this week reminded me how fundamentally resilient and competitive its economy is. Washington did not show any signs of recession, with the perfect blend of cool summer evenings and young students and old tourists wandering around.
The IMD world competitiveness rankings revealed that the US is once again No 1, followed by Switzerland and Hong Kong. Asia-Pacific economies performed well, with 10 in the top 30.
The strength of the US economy is that it remains the world’s most technologically powerful
Taking a 15-year comparison, the IMD rankings showed that the winners since 1997 are China, Germany, Israel, Korea, Mexico, Poland, Sweden, Switzerland and Taiwan. These gained five places or more in the rankings.
How strongly is the US economy recovering? Opinions seem divided. US Federal Reserve chairman Ben Bernanke's testimony to Congress last month suggested that the recovery is on track, with gross domestic product growth of 2.5 per cent in the first quarter this year, compared with 1.75 per cent during 2012. The unemployment rate of 7.5 per cent in April was 0.5 percentage points lower than last summer. Consumer inflation has come down to 1 per cent in the year to March, although the consensus on long-term inflation seems to be in the 2 per cent range.
The good news so far is that the housing market is improving. The latest flow of funds data suggests that the net worth of households and the nonfinancial business sector improved fairly strongly in 2012 and 2011, on the back of improved housing affordability and a stock market recovery, as a result of quantitative easing.
The biggest headwinds against the US economy are the weak export market to Europe and the large fiscal overhang. State governments have increased local taxes and cut state spending. In the past four years, they have cut 700,000 jobs. The fiscal austerity drive is beginning to bite, with the Congressional Budget Office estimating that the budget deficit laws would cut GDP growth by 1.5 percentage points this year.
This was why Bernanke felt that with short-term interest rates already close to zero, "monetary policy does not have the capacity to fully offset an economic headwind of this magnitude".