2018/11, 13 February 2018
USA is the largest, most vibrant, and flexible economy in the world, however less so than a decade or two ago. The wildly fluctuating stock market in recent times is not a good omen.
A benign and positive outlook does not call for contingency planning, but dark clouds looming in the horizon do. Is there anything to worry about in this changing economic environment?
First, since 2010, US annual growth has been not outstanding, averaging 2.16 percent. Unemployment is now at a 17-year low at 4.1 percent, but lesser known is that the employment-population ratio has dropped to 60.1 percent after having peaked around 67 percent fifteen years ago. Including those who can work, but do not fulfil the criteria of being at the disposal of the labour market, unemployment has almost doubled. This puts a large question mark on the policy stance by the FED allegedly based on the fear of an overheated labour market.
Second, US debt is climbing up. Private consumption driving economic growth is half fuelled by household dissaving. The federal budget plunged into sharply deepening deficits increasing the net interest burden. For fiscal year 2017, the net interest burden was 1.4 percent of Gross Domestic Product (GDP). The projected annual average according to the Congressional Budget Office (CBO) for 2018-2027 is 2.2 percent; and for the following decade will be 3.4 percent amounting to 12 percent of the federal budget in the early 2020s, and 18-20 percent in the mid-2030s. Finding the money to service the debt will turn into a major challenge for the US.
Third, President Trump made it clear in his State of Union speech (on 30 January 2018) that the US is becoming more introvert and less committed to economic globalization. He spoke about bringing jobs, plants, and capital back to America – a recurrent theme in his presidential campaign. What was said about trade pointed to a more protectionist attitude.
For Asia and Southeast Asia, the response seems to rotate around two axes.
The first is to convince the US of the benefits of global trade and investment. Even if the US concludes that it is benefitting less now, it is still most dependent and is reaping the largest benefits from the global system set up by itself (and Britain) 70 years ago. The US has also consistently promoted a global system anchored in rule of law and mutual benefits. It cannot avoid losing the mantle as the global moral leader by abandoning this hard-won leadership. Economic losses suffered by allies and partners may dwarf compared to the feeling of being left behind in an increasingly unpredictable and dangerous international environment. It takes a long time to build trust and reputation.
The second is to realize that the world is moving towards some kind of regional economic structure. The global supply chain is no longer preponderant; regional supply chains and regional connectivity are gaining ground. Nowhere is this more visible than in Asia with a supply chain/connectivity building up prompted by China’s rising economic weight. A decade or two ago Asia produced for consumption in the US and Europe. Now Asia produces increasingly for consumption in Asia.
This requires a stronger and more robust regional economic integration. Asia who benefitted so much from global trade should champion steps to build such a framework without endangering the global framework of which the World Trade Organization (WTO) is still a cornerstone. It is encouraging to see 11 Pacific Rim countries go for a Trans Pacific Partnership (TPP) even after the US withdrew, while still keeping the door open for the US to rejoin. Likewise, the Regional Comprehensive Economic Partnership (RCEP) among ASEAN and six other countries falls in the same category.
Southeast Asian countries are geographically close to China, Japan, and India (number 2, 3 and 7) on the list of countries ranked according to GDP. The GDP of these three countries together makes them an economic powerhouse equal to the US and with a far higher economic growth potential.
The US economic decline and Asia’s rise is not an abrupt phenomenon. It has been in the cards since Japan boomed in the 1970s and 1980s and Deng Xiaoping launched his reforms in 1979. The political and economic challenge for Asia and Southeast Asia is to continue to adjust and avoid sudden changes. This is why preparation and planning are key words.
Joergen Oerstroem Moeller is Visiting Senior Fellow at ISEAS Yusof Ishak Institute, and Adjunct Professor at the Singapore Management University & Copenhagen Business School.
The facts and views expressed are solely that of the author(s) and do not necessarily reflect that of ISEAS-Yusof Ishak Institute. No part of this publication may be reproduced in any form without permission.