The US will take comfort in being a leading oil exporter

The May 2013 IMD World Competitiveness Report says that the US is again number one, followed by Swtizerland (2nd) and Hong Kong (3rd).    Asia-Pacific economies performed very well, with 13 spots in the top 30, with Singapore (4th), the UAE (8th), Qatar (10th), Taiwan (11th) and Malaysia (15th) in the top 15, and Australia (16th), China (21st), Korea (22nd), Japan (24th) and Thailand (27th) in the top 30. 

In contrast, the European economies have stagnated, although Switzerland, Sweden (4th) and Germany (9th) performed well because of their export-manufacturing competitiveness, diversified economies, strong SMEs and fiscal discipline. 

Taking a 15-year comparison, the IMD rankings showed that the winners since 1997 have been China, Germany, Israel, South Korea, Mexico, Poland, Sweden, Switzerland and Taiwan. Half of the losers are European economies, and the Latin economies like Argentina, Brazil, Chile and Venezuela also did not do well.

The consistent performers are the US, Singapore and Canada. The improvers are Hong Kong, Taiwan (11th), Norway (6th), South Korea (22nd) and Poland (33rd).  On the other hand, the two that showed volatility in ranking are Malaysia (15th) and Indonesia (39th).  

How well is the US economy recovering? The opinions seem to be divided.   Federal Reserve Chairman Ben Bernanke’s testimony to Congress on May 22 suggested that the recovery is on track, with GDP 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 a 0.5 percentage point lower than last summer. Consumer inflation came 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 US housing market is improving. The latest flow of funds data suggest that the net worth of households and the non-financial business sector improved fairly strongly in 2011 and 2012, on the back of improved housing affordability and 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. The large fiscal expansion in the early stages of the crisis is now tapering off, being offset by fiscal tightening at the state government level. Since state governments have to run balanced budgets, they have increased local taxes and cut state spending. In the last four years, the state governments 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 per cent in 2013.  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”.

The real strength of the US economy is that it remains the largest and most technologically powerful economy in the world, with cutting-edge superiority in creative science, computers, medicine, aerospace and military equipment, and superior research and development skills in top universities and research institutes. It is also a market-oriented economy, with US companies accounting for 132 out of the Fortune Global 500 companies, and four out of the global top 10 companies by revenue.  

The game changer for US competitiveness is not just the revolution in technology, but also the rise of shale oil. Improvements in fracking technology to extract oil out of shale, developed mostly by the private sector, threaten to change the global energy landscape. With this technology, and the high level of shale oil resources in the US and Canada, North America will become not only self-sufficient in energy production, but also a net energy exporter.  

Oil prices are already under pressure, because Iraq is revitalising its oil production. Despite the retreat from the use of nuclear energy, the latest International Energy Agency report, published in November 2012, suggests that the world energy outlook will change dramatically in the face of improvements in energy efficiency, continued growth in the use of solar and wind power, and unconventional gas production.  

By around 2020, the US is projected to become that largest global oil producer, overtaking Saudi Arabia, and together with improvements in transport energy use, the US will become a net oil exporter by 2030, compared with the current position of a net importer of 20 per cent of its energy needs. 

This has very profound impact on the US’s competitiveness and geopolitical situation. First, the US can either choose to tax the newfound energy source to reduce its fiscal debt, or use lower energy prices to boost its exports and corporate competitiveness. By comparison, China, India and the Middle East will account for over 60 per cent of the increase in energy demand. This means that Chinese and Indian enterprises will continue to have higher energy costs than US companies, despite cheaper labour costs.   Even cheap labour cost is no longer a real advantage with the rise of robotics and 3D printing, which will enable home production instead of relying on imports. 

The real upside for the US is that it can be much more hands-off in the Middle East political quagmire, whereas the energy dependent countries like China, India and Japan will be more affected by Middle East politics. Hence, if a stable and strong country like Turkey can also get into turmoil, as we are seeing, the game change could be much more profound.   

Despite its many internal challenges, the US remains a haven of political stability in an increasingly turbulent world. 

 

Andrew Sheng is president of the Fung Global Institute.