During our Strategy Workshop (Oct. 12) we laid out rationale on where global risk sentiment lies, ho...
The New Global Economic Outlook
04/11/2012 10:00 am EST
In this wide-ranging discussion, David A. Wyss, visiting fellow from the Watson Institute, shares the demographic and economic outlook for China and the US.
David, let’s talk about China for a minute. It’s expected to surpass the size of the United States in some estimates by 2017, or 2019, and yet there are open questions about their birth rate, their population, whether their capitalist experiment can sustain itself…
Well, I think it can sustain itself for an extended period of time, and I think they will pass us. Remember, they’ve got almost four times as many people as we do, so even though total GDP will be higher than the US, it’s still going to be a relatively poor country. Per capita income’s still a lot lower that they are in the US, so don’t let the size fool you to much. They’ve got a long way to go.
At the same time, I think they’ve done a very successful job of combining a capitalist economy with, well they call it a communist government. I’m somewhat dubious as to whether it really deserves that name anymore; they don’t really believe in Marxism in the old sense.
In a sense what they’ve gone back to is an old-style Mandarin government, a government by examination admission to the party, the political process depending on how well you do in the universities. That’s in the Chinese tradition, and I think it fits their society relatively well.
So if China emerges, they’ll have four times our population. They’ll have a greater GDP. Are you concerned about China from a military point of view? Are you concerned about China as it enters the global stage and leads the United States?
I’m worried about problems with China in the longer run. I don’t think China’s going to be an aggressive power in trying to push military overseas against US interests, but there are some obvious flashpoints in the Chinese area—including Taiwan, which China wants as part of China.
The situation between North Korea and South Korea is a problem. China does not want that to erupt because it likes South Korea. The problem is, North Korea is their ally.
There are problems in the South China Sea, particularly in oil resources in that area and border disputes between the Philippines, China, and Vietnam. Those could all erupt into regional conflicts, and there’s a risk that the US would want to stick its nose into those.
Any other concerns in China from the standpoint of they do have market crashes from time to time? They do have an overinflated property market from time to time.
Yeah, the one thing that does worry me in China is the property market. I think you’ve got a real property bubble in China, both in residential and in nonresidential properties.
We complain here because property prices in the US, the average home got up to about 3.5 times average household income. In Beijing and Shanghai right now, the average first-time homebuyer is buying a home at 16 times his income, and in some of those cities the carrying costs on that home, the monthly mortgage payment, is over 100% of income for the average homeowner. That strikes me as unsustainable.
Indeed. How about housing here in the United States?
I think things are stabilizing overall. We’re beginning to see signs of home prices flattening out. I’m not going to say they’re recovering. Sales have improved a bit, so I think it’s getting better.
Now in the most overbuilt regions, including Florida for example, there may be still some downside potential. But for national averages, I think you’re seeing things starting to improve. The average home is now below its historical average relative to income, down around two times income, compared to an average of 2.6 and the peak of about 3.5.
So housing valuations, at least by that measure, have become reasonable?
They’re cheap, by historical standards. We’re at the lowest levels we’ve seen since the 1970s on ratio of home price to income…but it does depend on where you are in the country.
Indeed. And then we need a million or two homes to replace latent demand in the economy, and that applies to this year?
You need about a million and a half houses a year just to keep up with population growth, demand for teardowns, etc. So housing starts around a million and a half, sort of the long-term sustainable rate. The last two years we’ve built between 500,000 and 600,000, so we’ve gotten rid of a lot of excess demand.
You know, at the peak we were building over 2 million a year, so we built up an excess housing stock that needs to be absorbed before there’s really much demand for new homes.
And the jobs market is not going to change very much in 2012?
Things are improving, but they’re improving very slowly. The unemployment rate’s down to 8.3%. That’s better than 10.1%, where we were at the peak, but it’s sure not normal.
We’re only gaining 2 million jobs a year, 2.5 million jobs a year. That’s normally about what you expect. That’s barely above what you need just to keep up with the growth of the working-age population.
Speaking of the jobs market, Steve Jobs told Barack Obama not to expect a recovery in the manufacturing sector in the United States. Is that your belief?
I think you’re getting a little bit of a recovery in the manufacturing sector. It is improving. You’re seeing some jobs moving back to the United States, both manufacturing jobs, call center jobs, these kinds of things.
But you know most of the decline in manufacturing is a share of income. It’s not because of foreign demand. Most of it’s because we spend a smaller share of our income on manufactured goods than we used to. As you get richer, you can still only drive one car at a time.
Indeed. And the aging of America is a major factor in that regard.
In two ways. No. 1, you’ve already bought all the durable goods that you need, speaking personally. Secondly, it means health care is absorbing a bigger and bigger share of the economy.
Are you bullish on health care long-term?
Well, it depends on what you mean by that. I’m bullish in the sense that you’re going to have a lot more jobs for doctors and nurses, because as we get older we’re going to get sicker. I wish that weren’t the case, believe me, but I’m afraid it is.
And are you bullish on any other sectors in terms of demand/supply characteristics?
I think a lot of sectors will be improving and generally moving toward a service-based economy. As people get older, they spend more money on things like travel, so I think leisure and hospitality will generally do fairly well.
I think that they’re going to spend more money on services rather than goods. I mean, when I was growing up everybody mowed their own lawn. I don’t mow my own lawn anymore. Almost nobody I know does.
Indeed. So it’s a service economy, housing’s recovering, and we’ve got problems in China. But it is growing very rapidly and will surpass the US in GDP terms, just not in per-capita GDP terms.
Per capita GDP will be a very long time. I’m not going to have to worry about that one.
A poor but very large country with a larger economy than the US
There are a lot of Chinese. And India’s coming along right behind them. They’ve got about half China’s GDP, both in per-capita terms and absolute terms. It’s going to be interesting to see which of those two countries grows the fastest, but they’re probably both going to be bigger than the US in a generation.
Are you particularly excited about any of the other BRIC nations besides China?
Well, Brazil remains a very strong economy. They’ve done a lot of right things presently. They’ve made a lot of reforms that surprised many of us who thought, you know, he was a left-wing socialist. Actually, he was very business-friendly as a president, and the economy has done very well.
And with the some of the energy discoveries down there, I think it could do even better over the next few years, so I think Brazil has been a positive surprise. Russia remains an oil state. It’s going to rise and fall with oil prices. But India and China are the stars.
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