VOL. 127 | NO. 41 | Wednesday, February 29, 2012
The Worldly Investor
The Economic View From Above
DAVID S. WADDELL
Reframing the Global Economy This week I will summarize my 30,000-foot view on the global economy. While the news flow may revolve around Europe, the global economy no longer looks to the Old World for leadership. To understand and accurately forecast the future economy, we must redirect our gaze from the Old World to the New World.
The Old World There are three concurrent crises in Europe: a sovereign debt crisis, a banking crisis and a growth crisis. Let’s consider each. Greece is broke. They can either stay in the Eurozone and deflate their economy or they can default. Frankly, history suggests they would be better off defaulting. Over the last 15 years, countries that have defaulted experienced five-year growth rates post-default that were over twice as fast as their five-year growth rates pre-default.
Furthermore, these occasional national defaults did not derail global economic growth. Reports of Greece mattering have been greatly exaggerated. What does matter is the European banking system. While the American economy and the European economy are roughly the same size, the European banking system is four times larger and equally as vulnerable.
However, the ECB has liquefied the banking system, nullifying the risk of collapse. Markets have calmed, and credit spreads have narrowed. Reports of economic contraction among indebted European nations crippling global economic growth have also been exaggerated. The Italian, Spanish, Greek and Portuguese economies combined represent less than 5 percent of global GDP. In size, the Greek economy approximates the economy of Maryland. These economies can hibernate for years without meaningful global economic consequence.
The New World With the Old World economies burdened, where will growth come from? Where the people come from. Of the seven billion people on the planet, only 1.3 billion reside in the developed world and all of the incremental population growth occurs in the emerging or New World nations. Globally, urbanization levels will rise from 50 percent today to 70 percent by 2050.
This mass urbanization of the emerging world is the fuel powering global economic growth. While the New World contributed 53 percent of global economic growth between 1996 and 2005, it contributed 83 percent over the last five years, while Europe contributed 5 percent. A downshift in European growth goes barely noticed within today’s global economy, where the emerging markets constitute 50 percent of global GDP.
While the Old World may be burdened with debt, the New World is not. In fact, combining the deficits of the Old World with the surpluses of the New World produces a global government debt situation far below threatening levels.
When we measure global prosperity, the reduction in wealth among the Old World nations since the great recession has been more than offset by the increases in wealth among the New World nations. Only three years after the greatest financial crisis since the great depression, aggregate global wealth hit record levels at the close of 2011. Proving again that crises are merely speed bumps on the road to prosperity.
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.