A Couple of Falling Stars

February 23, 2010

A column in Tuesday’s Financial Times observes that some forty years in which the United States and Japan have held the top two slots in national GDP rankings will end sometime this year when China overtakes Japan.  Although those Asian economies remain far apart on a per capita basis, Japan’s star has indeed fallen many notches.  Real GDP in Japan expanded 7.8% per annum over the 25 years to 1980, 4.4% in the eighties, but only 1.0% per annum during the past two decades.  Japan’s metamorphosis from economic juggernaut to chronic weak link is reflected in the Nikkei-225 stock index, which since end-1989 has declined 6.4% per annum compared to rises of 7.4% per annum in the Dow Jones Industrial Average, 5.8% per annum in the German Dax, and 4.0% in the British Ftse.

In certain respects, the U.S. economy has also run off its rails.  U.S. real GDP advanced 3.9% per annum in the third quadrant of the twentieth century (1950-74) and 3.4% per annum in the final quadrant but by only 1.8% over the past decade.  Employment contracted 0.1% annualized between December 1999 and January 2010 compared to a pace of positive job gains of 2.4% annualized over the final 60 years of the twentieth century, and in none of those six decades did growth in jobs drop appreciably below the norm for the whole period.  Compared to the end of 1998 when many European nations adopted a common currency, the German Dax had risen on net by a disappointing 1.0% pace per annum, but the Dow has done no better, advancing also by just 1.0% per year on balance.

The gap between advanced economies and emerging ones is narrowing not merely because of rapid development in the latter group but equally because the advanced nations are stuck in a structural malaise, which is already long in the tooth and likely to stretch out far into the future.  The Great Recession was a symptom of that broader slump, not a self-contained event that happened only because of a rare perfect storm of causal factors.  Growth was weaker than normal for several years before the recession and will be weaker than a typical recovery during the coming years.  The euro has struggled lately as the fiscal problems of Greece, Spain, Ireland, Portugal and Italy intensify doubts that European Monetary Union will endure and concerns that economic growth or price stability or both will suffer if Europe’s politicians make accommodations to preserve the union at all costs.  This focus on Europe’s half-baked attempt at policy integration masks the bigger development of emerging markets gaining rapidly on all the advanced nations.  In time, these Teutonic shifts between former have- and have-not economies will put pressure on the present dollar-centric international monetary system.  Conventional wisdom that such a point is not going to be reached for many more decades may prove overly conservative.

Copyright Larry Greenberg 2010.  All rights reserved.   No secondary distribution without express permission.

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