US Growth Depends on China

08/10/2011 8:30 am EST


Yiannis Mostrous

Editor, The Capitalist Times

The health of the US markets is no longer the key driver in the global marketplace, and it slowly being supplanted by China as the economic bellwether, observes Yiannis Mostrous of Investing Daily.

Real GDP growth in the US bottomed out in the second quarter of 2009, and the subsequent rebound has been the weakest on average in more than 60 years. This will come as no surprise to any American.

Consequently, the anxiety over the country’s economic future has less to do with the financial crisis, than with a less agile US economy and broad changes in American society.

Many US citizens are unable or unwilling to accept what is obvious to the rest of the world. The US is gradually becoming an aging, slow-growing economic power with a citizenry seeking a wider social safety net and more distribution of public funds.

Even the staid Congressional Budget Office still assumes that US economy will eventually return to its “traditional” 3% rate of growth. It’s curious that people routinely believe that the US can achieve 3% growth in real GDP.

Perhaps the 1980s and 1990s left economists and investors with such fond memories that it’s difficult to let go of this notion. But the world changes. As we’ve said before, we’ve reached a watershed moment in history, when other countries will post faster and more sustained economic growth than the US.

During the next five years, the US, UK, and mainland Europe will experience subdued growth. A deflationary trend remains intact in the US, which explains the weak economic rebound since 2009.

Things aren’t any better in Europe. The continent’s saving grace is Germany, and the country will inevitably formally take the reins of the EU, spearheading the financial integration that will be necessary to preserve the EU and the euro.

Germany is one of the world’s most successful exporters, second only to China. Germany exported $1.3 trillion of goods last year, representing 8.3% of total global exports.

German companies support the euro because the common currency doesn’t offer the advantage of “competitive” devaluation to those who compete with the German export machine.

That being said, exports remain the saving grace for big Western economies and large emerging economies. Exports have accounted for 47% of real GDP growth since the US economy bottomed out in the second quarter of 2009; exports have risen 21% during the same period.

A broad range of US companies—from resource-related names, to technology, to consumer-products makers—have seen their sales to China take off.

In fact, about 5% of the S&P 500’s profits are derived from China, and that number is expected to double in the next three to four years. A look at the second-quarter earnings scoreboard provides evidence of this trend.

Apple (AAPL) said that iPhone sales in the Asia-Pacific region nearly quadrupled, while year-over-year sales in greater China increased sixfold. United Technologies (UTX) said that its second-quarter growth was led by China and Russia; new equipment orders rose 30% year over year in China.

Sales volumes for Coca-Cola (KO) in China grew by 23%, and the company has doubled its mainland business during the past five years. Management from Yum! Brands (YUM) recently said, “… we had simply outstanding results in China while US performance was poor.”

McDonald’s (MCD) said that China accounted for 66% of new overseas openings this year. The number of new stores in China will triple by year end, to more than 180.

Finally, Starbucks (SBUX) said that China remains the key market for its international growth strategy. The company expects China to account “for one quarter of international new store additions in 2012” and management has targeted a total of 1,500 stores in China by 2015.

As the saying goes: The rest is history.

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