The State of the Economic Party

Chris Waller - February 2013
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Once again it's that time of year when I take delivery of my favourite bed-time reading, 'The Pocket World in Figures' from 'The Economist'. This is the 2013 edition but, a caveat, the figures listed generally relate to the year ending December 31st 2010. It takes a full two years to digest and collate all the numbers so, unless stated, the figures give the situation as at the end of 2010.

Despite all the economic hiatuses, the US economy still holds the No.1 slot with a GDP of $14,587 billion, but China now holds second place ($5,927 bn) pushing Japan down to 3rd place ($5,459 bn). Germany and France hold the fourth and fifth places as they did last year with GDPs of $3,281 bn and $2,560 respectively. So, notwithstanding its manifest economic problems, the USA economy is still as big as the next three largest economies put together. The United Kingdom comes in at No.6 with a GDP of $2,262 bn and thus the top six economies in the world as measured by GDP remain unchanged except for China's upward move by one place in the table.

GDP is a crude measure of economic performance but if we look at the relative ranking of economics by purchasing power, then India moves into 4th place at $4,195 bn, pushing Germany down one place. Similarly, Russia comes in at 6th place at $2,820 bn while the UK slips to 7th in the ranking. However, if we now look at GDP per capita, a very different picture emerges. Luxembourg takes the No.1 slot at $105,190. In 2nd place we find Bermuda at $89,240 while the Norwegians come in at 3rd place with $85,390 per capita, their oil revenues no doubt contributing massively to this figure. By this reckoning, the average US citizen is now relegated to12th place at $47,150, while the UK is down at 28th place with a meagre $36,340 each. What is shocking is that the average Somali earns a mere 110 per capita: each citizen of Luxembourg thus enjoys a yearly income equivalent to that of 956 Somalis.

Despite its gross economic performance, China does not even appear in the top 60 countries as measured by per capita GDP and this is an indication of the scale of the problem facing China in raising the incomes of almost another one billion people.

Given that GDP is a very crude measure of economic performance, and that even GDP per capita is still only a part of the story, a country's Human Development Index gives a more rounded picture. HDI is often taken as a measure of general development, but is in fact only a measure of economic well-being. Nevertheless,, as measured by HDI, Norway is the most benign county to live on with an index of 94.3 (on a scale from 0-100), with Australia is 2nd place at 92.9 and the USA and Netherlands joint 3rd at 91.0 while the UK finds itself at No. 27 in the ranking.

If we now turn to economic growth, then the picture is less rosy for what is termed 'the developed world'. These figures represent the average percentage growth in GDP from 2000 to 2010. Equatorial Guinea holds the No. 1 spot with a staggering 17 % per annum, though it has to be said that this is entirely down to oil revenues. China has achieved a very respectable 10.5 % per annum, but this based mainly on manufacturing. What does come as a shock is when we look at the lowest economic growth. Japan has managed only 0.7 % per annum over that same period, while Germany has fared little better at 0.9 % per annum. The US achieved 1.6 % per annum while the UK, despite perceptions, has managed 1.7 % per annum. In all cases, it must be remembered that the full effects of the financial crash of 2007-08 has yet fully to filter through into these figures. Nonetheless, these figures do indicate the extent to which the financial crisis has damaged the developed economies. All this said, we can console ourselves with the fact that the Zimbabwean economy actually shrank by over 5% during this period.

Notwithstanding the financial crisis, and particularly the travails of the euro zone, the picture in the developed world is not all gloom and doom. The Euro Area (16) is still the world's biggest exporter (goods, services and income), taking a full 15.9 % of world trade in this category. The US comes in 2nd place at 11.9 percent but China has now displaced Germany from 3rd place with 9.0 % of world trade. However, Germany is still without doubt the European powerhouse, itself taking 8.4 % of world trade. The UK comes in 6th place with 4.3 %, down one place from last year, with a drop in exports of almost 9 percent.

Taking goods alone, China is, by a good margin, the world's biggest exporter (10.4% of world trade) with Germany and the US equal 2nd (8.1 %). The UK sits in 10th place (2.6 %), down one place in the last year. On the other side of the balance sheet we find the USA as the biggest importer of goods (12.3 %), with China in 2nd place (9.5 %), Germany 3rd (6.8 %), Japan 4th (4.6 %), France 5th (3.9 %) and the UK 6th (3.5 %).

Looking now at services and income, the Euro Area is once again the biggest player (19.2 % of world exports), with the USA 2nd (18.1 %). The UK is in 3rd place (7.4 %), this figure indicating the extent to which we are reliant on financial services, while Germany, often seen as primarily a manufacturing nation, in 4th place, generates 7.0 % of world exports. France is in 5th place (5.3 %) while, surprisingly, China is 6th (4.7 %).

We now come to what is the most troubling feature of the world economy at the present moment, that of deficits and surpluses. On the surplus side we find China at No. 1 with a massive $ 305 billion, followed by Japan ($196 bn), Germany ($ 188 bn), Switzerland (($ 77 bn) and Russia ($70 bn). China's surplus comes perhaps as no surprise, but Japan, long seen as a weakly performing economy, nevertheless generates a huge surplus, as does Germany. Russia now takes a significant place in the world economy as a massive exporter of gas and oil, whose revenues account for the greater part by far of its surplus. It is for this reason that Saudi Arabia and Norway appear in 6th and 8th places respectively, ($67 bn and $51 bn) as energy prices continue to dominate the world economy.

The other side of the account gives pause for thought. The biggest deficit is that of the USA ($471 bn), up $93 billion on last year, with Italy in 2nd place ($72 bn). The UK comes in 3rd place ($72 bn), while Spain is 4th ($64 bn). The Euro Area (16) as a whole has a deficit of $55 bn. The US deficit might look disastrous but given that the US economy is worth $14.5 trillion, then this represents only about 3% of GDP.

The deficit, of course, only concerns the current account. Government debt is the more critical factor and it is here that we find cause for alarm. Figures are as at year-end 2011.

Surprisingly, Japan is the world's largest debtor nation with a debt equal to 205 % of GDP. Less surprisingly perhaps, Greece is in second place at 170 %, Iceland at 128%, Italy at 120 % and Portugal at 118 %. Ireland, following its own financial crisis, is in 6th place at 114% while the USA is in 7th place at 103 %. However, we in the UK should not be complacent, with our government debt at 98% of GDP, up from 82 % the previous year, and still rising.

Allied to government debt is, of course, government spending and in this we find Denmark in top place, spending 58 % of GDP. France, not surprisingly in my experience, spends 56 % of GDP via its government. The Euro Area (15) as a whole spends 49.4 % of GDP via its governments and in this, the UK, at 49 % and down from 51% the previous year, is in keeping with the European average, but on the lower side. Even the United States government spends about 42% of its GDP via government.

Looking now at tax revenues, we find, not surprisingly, that Denmark is once again in top place, the government taking 48% of GDP. Germany, often thought to be a high-tax country, takes only 36% of GDP, only a little more than the UK government at 35%. The current British government has stated that it aims to make Britain a low-tax economy to attract investment, yet the German economy, which takes slightly more of GDP in tax, performs far more vigorously than does the UK, and at the same time seems to provide better public services, so one wonders how much further taxes can be cut in Britain without seriously damaging public services, and one has to ask whether any tangible benefits would ensue. These figures suggest that Germany is more effective in spending its tax revenues that the UK, a matter that warrants some investigation.

Industrial output is the principal driver of economies and it is not surprising that we find China in the No. 1 slot at $2,771 billion. The US comes in 2nd at $2,769 bn, Japan 3rd at $1,338 bn and Germany 4th at $827 bn. Once again, Japan surprises given that it is often seen to be in the doldrums economically. Britain ($437 bn) is ranked 9th, down two places on the previous year, and now below both Italy and France.

Taking now just manufacturing output, the USA is in pole position at $1,841 bn, with China 2nd at $1,757 bn. Japan holds 3rd place at $906 bn with Germany in 4th place at $614 bn. Britain once again holds 9th place at $231 bn, again down two places on a year earlier. In the last 8 years Britain has dropped from 5th place to 9th place in the ranking of manufacturing nations.

China is now the world's biggest producer, and also consumer, of lead, zinc, tin aluminium, rice, wheat, tea, rubber, cotton and coal. Services output shows a similar pattern. The USA is at No. 1 with $10,649 bn of output, with Japan in 2nd place at $3,605. China, often regarded as purely a manufacturing juggernaut, is in 3rd place at $2,557 bn, having overtaken Germany, in 4th with $2,083 bn. The UK is in 6th position in the table at $1,554 bn, trailing France at $1,876 bn.

All of this economic activity needs energy and this is increasingly a pressing issue, both in terms of maintaining supply and mitigating the environmental impact thereof. These figures are at year-end 2009.

The largest producer of energy, now by a significant margin, is China at 2,085 Million Tons Oil Equivalent (MTOE). The USA holds 2nd place at 1,686 MTOE with Russia 3rd at 1,182 MTOE. Saudi Arabia is 4th at 528 MTOE while India is in 5th place at 502 MTOE. Britain, once the world's most massive energy producer, albeit in 1875, is now down to 17th position at 159 MTOE, while Norway is in 13th position at 214 MTOE.

Ranked by energy consumption, we find China once again in first place at 2,257 MTOE, the USA in 2nd place at 2,163 MTOE, India 3rd at 676 MTOE, Russia 4th at 647 MTOE and Japan 5th at 472 MTOE. Britain ranks 13th at 197 MTOE, reflecting its move over the last 30-odd years away from heavy industry. If we now look behind those figures, we see that China is still a net energy importer at 8% of requirement, the USA importing 23 %, India 26% and Japan 80%. Norway is now a massive exporter of energy, producing over 6 times its own energy requirements. Britain, by contrast, imports 19% of its energy, down from 20 % the previous year and perhaps indicative of low economic growth - average growth in the UK's real GDP 2005-2010 is only 0.5% per annum.

Moving away now from the major building blocks of the economy, it's worth having a look at some of the secondary aspects - health, for example. There is an apparent desire in certain political circles to move our health service away from its current model and towards that favoured in the USA. Yet, if one looks at the figures for health spending internationally, that would be a disaster. Currently, the UK spends 9.6% of GDP on health, equal to that of Sweden, and very similar to that of Japan, Norway, Italy and Spain. The USA, by way of contrast, spends a massive 18% of GDP on health. Yet life expectancy in the USA is 78.8 years, below the 80.4 years here in the UK, and the USA does not even figure in the top 38 countries for the provision of hospital beds. One has to wonder where the money is being spent.

Within government spending, there is the category of defence spending and here the USA is far and away the biggest at a breathtaking $694 billion. China is in 2nd place at $76 bn - not really surprising with a standing army of over 2.25 million men - while the surprising contender for 3rd place is the UK at $58 bn. The empire on which the sun never set is still apparently costing us a fortune to defend. On the credit side of the books, we are the world's 6th biggest arms exporter, with sales at over $1 billion, though a mere minnow compared to the USA at almost $10 billion.

As the world's 'movers and shakers' gathered at Davos, it was reported that the UK economy had shrunk by 0.3% during the fourth quarter of 2012. During the majority of the post-war period the British economy grew at an average rate of about 2.25-2.5 percent. This is the trend rate of growth necessary for Britain to maintain its standard of living. All post-war attempts to increase this rate of growth have resulted in inflation, boom and bust. Thus, if the British economy fails to achieve the trend growth rate, it is, in real terms, actually falling behind other developed economies. An actual contraction of 0.3% in a quarter is a disaster. Boris Johnson, speaking to British business leaders in Davos, and quoted in the Observer (27/1/13), said, "Why... should we not partially re-industrialise our economy?" A fine sentiment but industry cannot just be switched on like an electric light. It takes decades to build industries and Britain has been de-industrialising for 35 years now. Yes, we do have manufacturing and we have some world-class companies, but we do not have nearly enough of them and it would take decades again to rebuild manufacturing to the levels and standard which we need.

There is, however, a much bigger threat on the horizon. Nicholas Stern, speaking in Davos on the subject of climate change said, "Looking back, I underestimated the risks. ... Some of the effects are coming through more quickly than we thought then. ... These risks for many people are existential." (Observer, 27/1/13). All of this becomes much more pressing when one looks currently at Australia where record droughts and high temperatures have been followed by the most torrential rain and flooding in living memory.

The new president of the World Bank, Jim Yong Kim, also speaking at Davos, warned that, "There will be water and food fights everywhere ..." . It is my own feeling that Davos and all such summits are now becoming irrelevant. Talk of international trade, tax rates and all the other stuff of finance is blinding the global political establishment to hard physical reality, which cannot be hedged, off-shored or bundled into derivatives. A genuine crisis is approaching.

Source

'Pocket World in Figures', publ. Profile Books Ltd in association with The Economist.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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