Economy

The Trillion Dollar Economies in 2014

The following is an extract from the forthcoming Strategic Estimate 2015, Khilafah.com’s annual assessment of the global balance of power.

Despite economic growth in 2013, much of this was artificial and unsustainable on closer inspection. In 2014 very little has changed as the global economic crisis reached its seventh anniversary. A point highlighted by the UK Prime Minister David Cameron at the G20 Summit in November 2014. David Cameron issued a stark message that “red warning lights are flashing on the dashboard of the global economy,” in the same way as when the financial crash brought the world to its knees seven years ago.

The top 10 trillion dollar economies represent 63% of the global economy, with the US economy by far the largest. They drive the global economy and assessing the state of their economies will show us why the global economy struggles to grow in 2014.

US – The world’s largest economy began 2014 with its economy shrinking nearly 3% in the first quarter. Whilst unseasonal wintery weather was blamed for the poor results, the failure of the US economy to sustain a healthy recovery 7 years after the financial crisis has exposed fundamental flaws in the world’s largest economy. Whilst the US economy did grow for the remainder of 2014 a closer examination shows the factors driving growth are artificial and not sustainable. US household expenditure, consumer expenditure, in fact all metrics of spending are barely rising. Highlighting US third quarter GDP figures Krishna Memani, chief investment officer at Oppenheimer Funds said: “The components may not be as strong as the headline number shows, the housing sector registered only a 1.8 percent gain, down from an 8.8 percent increase last quarter. And military spending, which jumped a whopping 16 percent, is notoriously volatile.”1 The main driver of the US economy has been the Federal Reserve tapering program of Quantitative Easing (QE). Quantitative easing entails central bank printing money through a bond-buying program. The US announced the end of this program in October 2014 after printing up to $85 billion a month at its peak. Whilst it remains to be seen if the US economy can stand on its own feet, what is clear that the growth that has been achieved to date has been stimulus and Quantitative Easing (QE) driven and without these it remains to be seen if the growth achieved in 2014 is sustainable.

China – The Chinese economy has been hit hard by the economic crisis. Its export markets were hit hard as they all fell into recession and the fall in Chinese exports was replaced with an expansion in real estate and infrastructure investment by the central government, this has now created a bubble in China’s real estate sector. China is now working to transform its economy from exports to internal consumption which means China’s integration into the global economy will become looser, and manufacturing will have to give way to services as the main economic engine. China’s contribution to the global economy will only reduce, going forward.

Japan– The world’s third largest economy went into recession again in 2014. This is the fourth occasion since the global economic crisis began in 2008 that Japan’s economy has shrunk. Japan’s economy has never recovered from the asset bubble collapse in the early 1990’s which led to Japan’s lost decade. Japan’s economy has been caught in a cycle of gradual economic decline caused by two factors. The first is Japan’s aging, declining population that has led to falling consumer spending, and thus falling prices for domestic consumer goods, which has all institutionalised deflation. The second is the world’s continued perception of the Japanese economy as a stable haven for investment, leading to strong demand for — and thus an increased value of — the yen. Japan has tried for decades to promote spending by keeping interest rates at virtually 0%. Multiple monetary stimulus programs have gained Japan the world’s most indebted country by GDP at 244%.

Germany – Germany is at the center of a regional trade bloc and as a result is the world’s fourth largest exporter, making it dependent on such exports. Germany’s exports were equivalent to 51% of its gross domestic product, or about $1.7 trillion, in 2013. Germany created an industrial plant that far outstrips the country’s capacity to consume. Germany’s economic viability depends on maintaining exports. No matter how much Germany imports, their exports maintain the domestic economy by providing a significant source of jobs. The problem with an export-based economy is that the exporter is at the hostage of its customers. As the global economy is still recovering from the global economic crisis most economies have seen cuts in consumption and imports and in the case of Europe, Germany which is the largest exporter has been adversely affected. Demand in Europe is critical to Germany and as the continent is largely in recession it is not surprising that the German economy is moving into recession.

France – The economic crisis hit France hard as it was owed much of the debt from the PIIGS economies. Since President François Hollande became president in 2012, France hasn’t managed two successive quarters of economic growth. The former Socialist Party leader’s program of more regulation, higher spending and punitive taxation – not least his 75% top rate of income tax, which has seen a flood of wealthy French professionals move to London. The only aspects of the French economy growing are unemployment, national debt and the government deficit. Welfare spending represents the largest in the world with French debt fast approaching the level of the PIIGS economies. At the heart of the French crisis is the fact that an ultra-rich 10% of the French population own over 60% of the nation’s wealth, half of the French population only possess a mere 2% of the nation’s wealth. This is why social welfare programs have been a central feature in the French economy in order to maintain social cohesion.

Britain – The country’s service sector accounts for 73% of the economy, but for the past 15 years its economy depended almost entirely on three sectors – finance, housing and the public sector. Between them, they employ about 33% of the workforce but have accounted for 120% of employment growth. In other words all the other parts of the British economy have, in aggregate, been shrinking during those boom years. With the global financial crisis originating from the financial sector, this engine driving the British economy shut down. The only way to have averted a recession was for other sectors of the economy to become driving engines in order to replace the financial sector, real estate and the public sector. The problem Britain has is its specialisation towards the financial sector has left the economy more narrowly focused, unbalanced, and at risk from financial shocks. As the financial sector stagnated and dragged the whole economy down with it, bailouts and Quantitative Easing (QE) temporarily picked up the economy, but these were never permanent or sustainable. This is why the UK economy constantly comes out of recession and begins growing only to fall into recession as it is QE that is driving the economy and not organic growth.

Brazil – Brazil has historically suffered from a crumbling economy, with periods of military rule and hyperinflation as successive governments attempted to print their way out poverty through expanding money supply. By the 2000’s Brazil was built around exporting commodities and minerals to the US and Europe. The parallel rise of China and its demand for energy and minerals changed the equation for Brazil’s economic architecture. This has resulted in China becoming Brazil’s number one import partner, which in turn has led to cheap Chinese goods flooding the Latin American nation at the expense of its own industries. Brazil is once again at the end of an economic model, but in order to become a dynamic economy with consistent growth spending on infrastructure will need to increase, it will need to radically reform an education system that produces far too few skilled workers and engineers, ease high taxes and outdated regulation and curb corruption.

Russia – Russia’s economy is largely commodities driven with extensive reserves of the world’s key minerals and resources. Russia is the largest global exporter of most of the commodities needed for industry. Despite an economy valued at $2 trillion, the Russian economy is heavily reliant on energy and its associated services with energy prices. As oil prices are falling, Russia’s economy has struggled throughout 2014 and will in all likelihood shrink in 2015 due to its dependence on energy prices.

Italy – Italy’s troubles are due to its regional composition. When the country was united in the 19th century, three distinct regions were brought together, the republics of the North, the central Papal States surrounding Rome, and the southern Kingdom of Sicily. These were extremely distinct regions to function as a single country as a result cultural divides have stayed impervious to change. Italy’s economy is today dominated by the North and Centre, whilst the South holds over 30% of the country’s population. Unemployment, crime, and black market labour are also concentrated in the South. Italian industry specialises in the mid-to-low consumer goods which China and other nations produce more cheaply. Over the last two decades Italy’s debt has grown to $2.6 trillion, well in excess of the economy. Until these structural issues are resolved, Italy will remain in an economic slump.

India – India’s economy is the odd one out in that it has not been affected by the global economic crisis. The improvements in the manufacturing sector, mining sector and large government investment in infrastructure is leading to Indian growth being driven by domestic sources rather than the global economy, which has been the main reason that has affected the other economies. As India represents only a small fraction of the global economy its growth will not be enough to drive the global economy, which will be weighed down by the other trillion dollar economies.

Whilst the global economy has seen some growth ever since the global economic crisis began back in 2007, this has been largely driven by emerging economies such as Brazil, Russia and India and not nations such as the US, China or Germany. The emerging nations, between them have accounted for 75% of total growth in the world economy over the past five years. These nations in 2014 saw their economies run out of steam as they were being driven by mineral resource mining or basic goods manufacturing, which was cheaper than anyone else. On its own, this was never organic or sustainable. This is why global economic recovery has been slow and choppy as the world’s advanced economies have struggled to grow. The global system currently operates on the western economies importing from cheaper emerging economies, who in turn export such goods that generate other economic activity in the West. For the moment, Western economies are struggling to grow, which is being compounded by austerity and stimulus. The emerging economies that picked up the slump in growth in 2014 began crumbling, talk of a rebalancing in the global economy is now out of the question.

STRATEGIC ESTIMATE 2015 – January 2015

Strategic Estimate 2015 is Khilafah.com’s fifth annual assessment of the global balance of power. We concluded our 2014 assessment with the US remaining the world’s superpower as it began rapprochement with Iran and through ensuring real change did not take place in both Egypt and Syria. In 2014, developments in the Middle East saw US military action in both Iraq and Syria and this has dominated the attention of US policy makers in 2014.

In 2014, a nation on the edge of Europe drew the attention and intervention of the world’s powers. On its anniversary, Ukraine is still being fought for by the EU and the US on one side and Russia on the other side who annexed Ukrainian territory in 2014. In Strategic Estimate 2015, we assess the position of the world’s powers and their attempts to steer Ukraine away from Russia’s clutches.

Russia in 2014 saw the overthrow of the Viktor Yanukovych, someone the Kremlin brought to power in 2010 in order to reverse the 2005 Orange Revolution in Ukraine. A stand-off ensued for all of 2014 with Russia making various moves to counter western attempts to bring Ukraine under Western control. Russia’s ‘Asian’ strategy of reducing both energy and trade dependency upon Europe continued in earnest with the historic deal with China for the export of $400 billion worth of gas from the Russian Far East to China over the next 30 years. The impact of this on Russia’s position in the world and the ramifications of what is taking place Ukraine will be assessed.

In Strategic Estimate 2014, the sustainability of China’s rapid economic growth based upon low wages and aggressive exports showed the unmistakable signs that as a model it had run its course. Throughout 2014 China’s leadership initiated the first of many new programs aimed at economic transformation, including an unprecedented anti-corruption drive in the political realm. In Strategic Estimate 2015, we assess the challenges that lay ahead in this colossal restructuring and what the current economic slowdown means for China’s attempt to become a regional power.

As the global economic crisis shows little signs of ending soon this has continued to strain relations between the European Union’s member states as well as relations within a number of states. Both Scotland and Catalonia had referendums in 2014, showing separatist tensions remain a major issue in Europe. Tensions escalated between Germany and France in 2014 as France challenged German leadership in Europe and questioned the German deficit and debt targets. Over the past five years, Germany has used the European crisis to carefully introduce controls on the fiscal systems of EU members but as the economic situation struggles to improve friction between Europe’s powers is growing. Strategic Estimate 2015 will assess the economic situation in Europe and how the policies to overcome these are faring.

The global economic crisis reached its seventh anniversary in 2014 and the performance of the world’s premier economies during the year highlighted the underlying factors that led to the global economic crisis still persist.

In 2014 ‘MINT’ entered the global political lexicon, alongside the BRIC nations. Mexico, Indonesia, Nigeria and Turkey (MINT) became countries considered most likely to assume a place at the high table of economic success and political power. Tipped to follow Brazil, Russia, India and China (BRIC) they are considered to teeter on the cusp of potential greatness. In Strategic Estimate 2015, we assess their political and economic prospects.

As always an assessment of 2014 and the trends for 2015 and beyond will be outlined.