Debt, deficits and trading in the troubled world of 2018 IBISWorld Newsletter April 2018 Phil Ruthven AM, Founder IBISWorld Ten years after the GFC, many major economies are still struggling with either debt, deficits or current accounts (international trade and income balances), or all of the above. Before looking at these factors, it may be useful to see the pecking order of the big economies in 2018, as the chart below reveals. World s 30 largest economies Purchasing power parity (PPP) GDP terms, 2017-18 7.9% 21 st 30 th nations Egypt 1.0% Taiwan 0.9% Poland 0.9% Nigeria 0.9% Pakistan 0.8% Malaysia 0.7% Philippines 0.7% Argentina 0.7% Netherlands 0.7% South Africa 0.6% 16.0% Rest of world (161 nations) 19.1% Includes Hong Kong, excludes Taiwan 15.1% United States 14.3% 11 th 20 th nations 1.9% 1.8% 1.6% 1.6% 1.4% 1.4% 1.4% Iran 1.2% 1.0% 1.0% 2.2% 2.2% United Kingdom 2.5% 2.6% 3.0% 4.1% 3.2% 7.8% US$134 trillion World s 191 nations SOURCE: IMF & IBISWORLD 01/04/2018 Since the GFC, has overtaken the US to become the world s largest economy in GDP (PPP terms), has overtaken, and has overtaken, the and. Furthermore, the GDP of Eastern nations has now overtaken the GDP of the Western nations in an irreversible tectonic shift. The emerging economic power of the East headed by, and has been made easier by the debt levels, government deficits and slow economic growth of major Western nations. For example, Asia is growing at almost 6% pa, while the US and EU have struggled to reach even a third of that GDP growth over more than a decade.
Below are the debt levels and government budget balances (mainly deficit spending) for the major nations of the world. Interestingly, while debt levels as a share of GDP tend to be higher in developed economies, the two fastest growing economies, and, have high negative budget balances. Nevertheless, their GDP growth is nearly double their budget deficits, unlike the US and the, which have been living beyond their means, with deficit spending as a share of GDP often exceeding GDP growth for that year. Total debt levels Government, corporate and household, 2017 Netherlands S. Korea Switzerland World NZ 240 172 57 99 167 100 92 144 87 57 155 106 108 122 79 99 145 62 133 132 41 46 160 94 34 111 128 Government 41 89 121 (2 nd highest household debt ratio) 70 130 48 Corporate 64 90 68 Household 33 154 17 50 81 68 97 40 58 34 62 92 69 24 53 72 40 22 52 55 16 50 15 16 29 22 17 14 20 16 0 100 200 300 400 500 SOURCE: IBISWORLD 01/04/18 Government budget balances Largest economies 2017-18 Iran -7.0-7.2-3.5-4.0-4.5-4.9-1.0-1.2-1.8-2.1-2.1-2.2-2.6-2.7-2.8-2.8-10 -9-8 -7-6 -5-4 -3-2 -1 0 1 2 3 4 0.8 0.8 SOURCE: THE ECONOMIST AND IBISWORLD 18/04/2018
sits in the middle of the debt ladder, but nearer the virtuous end of the budget balance ladder, with prospects of being able to balance our budget for the first time in around 13 years, as we enter the 2020s. Regarding international economic affairs, the current account (trade and income balance) of leading economies is also revealing. Below we show the current account balance for 2018, and follow that with a dissection of the trade and income components, which make up the overall current account. Current account balance 2017-18 Poland -4.4-5.2 0.0-0.9-1.3-1.8-1.9-2.0-2.0-2.6-2.7 1.6 1.3 0.7 2.7 2.6 4.0 3.7 5.1 7.8 9.7-6 -5-4 -3-2 -1 0 1 2 3 4 5 6 7 8 9 10 SOURCE: THE ECONOMIST AND IBISWORLD 01/04/2018
Current account balance by components 2017-18 Poland -10.0-11.0 14.0 9.7-5.4 8.1 7.1 0.7-0.9 6.2-2.0 3.3 2.5 0.1 2.4 7.3-0.5 1.0-2.8 0.9 0.9 2.8-2.2 0.4-0.6 0.6-1.6-1.0-0.7-1.3-2.1 0.5-2.4 1.5 2.0 2.2-4.7-6.6-8.2-8.4 6.2 3.2 Trade balance Incomes balance -12-10 -8-6 -4-2 0 2 4 6 8 10 12 14 16 SOURCE: THE ECONOMIST AND IBISWORLD 01/04/2018 Given that the world s current account balance is a zero-sum outcome, the first table is split somewhat equally into the positive and negative balance nations. Ditto trade and income balances, but with interesting nuances. While President Trump is railing against a trade deficit nearing a trillion dollars, the US s income balance is positive due to its big corporate incomes from offshore investments. The positive income balance is nowhere near enough to match the negative trade balance. However, the US faces a double or triple whammy as a result of recent decisions by its president. Seeking the return of foreign investment back into the US via dramatically reduced corporate taxes means lowering the income balance from offshore corporate activity on its current account. Placing tariffs on steel and aluminium, and other products is likely to make a lot of manufacturers more expensive in the US and less competitive abroad, worsening the trade deficit. Any retaliation by other countries can only aggravate the situation further. sits close to the virtuous middle of the ladder on its current account, based on a modest trade surplus and a manageable income deficit in 2017. But our economic growth is sputtering at just over 2% growth in 2017, around 1% below the long-term average since the end of the Industrial Age in the mid-1960s of 3.2% pa; and more than 1% below the 3.5% pa growth over the past century.
Interestingly, our poor economic performance of the past decade in particular, as seen below, is less to do with our debt levels, deficit spending (chronic though they have been) or current account. And we are spared the worst of any trade war started by President Trump due to our economic integration into Asia, which accounts for two-thirds of our trade these days. Our malaise is internalised with the absence of economic, tax and labour reforms, and a dearth of statesmanlike leadership for over a decade from either of the main political parties. s economic growth Annual real GDP growth (%) progressed to quarters in December 2017 (and forecast to June 2021) 8 7 6 s 3.5% pa (52 years) 3.2% pa (since 1987) 5 GDP growth (% p.a.) 4 3 2 1 0-1 -2-3 -4 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 Year ending June SOURCE: IBISWORLD 01/04/2018 And like many of the world s democratic governments, it has been the emotionalist or populist ideology that has been in the ascendancy over rationalist government for too long. This problem will continue into the next decade before rationality, courage and leadership reasserts itself. But yet again, it will come after the forgotten or ignored lessons of history have been repeated. Copyright IBISWorld Pty Ltd 2018 IBISWorld makes no representation to any other person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability that cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Pty Ltd. In the event that the purchaser uses or quotes from the material in this publication in papers, reports, or opinions prepared for any other person it is agreed that it will be sourced to: IBISWorld Pty Ltd.