Signs of modestly higher inflation and a robust jobs market in the U.S. have many economists cheering the recovery in the world’s largest economy. Despite this optimism, one asset management firm has signaled that this could mean a gloomy future for the rest of the world.
Last week, U.S. consumer prices for April recorded their largest increase in 10 months – in stark reflection to concerns about falling and low prices in Japan and the euro zone. U.S. stock markets continue to outperform the global index as the traditional engine room of global growth edges back to full power.
U.K.-based global asset manager Schroders says U.S. activity looks set to accelerate as we head into the summer. In a new note on Friday it detailed the different reasons behind this pickup, but adds that these same reasons could be ready to hit exporters and destabilize growth in the rest of the world.
“The U.S. is likely to be less of a locomotive for global growth than it has been in previous cycles. Consumer spending is likely to be more lackluster and, of the demand generated by the U.S., more is likely to be met by domestic rather than overseas production,” its analysts said in the report.
“It is not good news for the rest of the world particularly those economies which have relied on selling to the U.S. The emerging markets are vulnerable in this respect.”
Trade balance data for March showed that the U.S. currently imports $40.38 billion than it exports, according to Reuters data. However, before the financial crash of 2008, this was significantly more with the country regularly posting trade deficits of over $60 billion.
According to Schroders there are four reasons why a repeat of the pre-crisis trade boom days are a long way off:
Schroders call this the “overarching” explanation from the U.S. recovery and this reshuffling of its trade balance. “The dollar is more competitive today than during the last recovery. Since 2002, the dollar is down by one third in both real and nominal terms and the competitiveness of the U.S. is reflected in the growing phenomenon of on-shoring,” it said.
The asset management firm now sees countries like Brazil, India, Turkey, Indonesia and South Africa having to readjust that their own economies, adding that the trade data highlights that there will be no return to pre-2007 export growth.
“This takes time and in the interim there will be excess capacity and slack as the world economy moves to a new configuration. Consequently the deflationary pressures which have been apparent in recent (inflation) prints around the world are likely to persist,” Schroders said.
A different hypothesis comes from Sheila Patel, the CEO of Goldman Sachs Asset Management International. Speaking to CNBC last week she said that that the current bull market for global expansion has longer to run and that if investors believed in the U.S. recovery emerging markets is a “real place to take a second look.”
Many analysts and politicians say this resource is the next industrial revolution. Hydraulic fracturing, or “fracking,” has helped lead a boom in gas and oil production in the U.S. The new technology is unlocking oil and shale gas resources, spurring economic activity and giving industry a competitive edge with less expensive gas and electricity prices.
After the crash of 2008, companies found it almost impossible to finance international trade deals. Schroders argues that this has never fully recovered meaning that companies are forced to source more from home.
The technology landscape has seriously evolved — even in the last five years. The enthusiasm for personal computers has been replaced by smartphones and tablets. At the forefront of this is the California-based tech giant Apple which has been bolstering U.S. growth numbers in recent years.