Archive for April 2014

Shifting powers impact future paths

April 5, 2014

Jurmala Turtle

There are some strong changes ongoing in the global arena that will influence the  business environment of tomorrow. I will discuss here some of those shortly. One  less spectacular change is that the European Union has been able to get the joint  area rectified from a long lasting downward path. The EU as a whole is  economically stable now although there are still huge differences between areas.  This means that Europeans are earning more than they are spending – the area is  not adding any debt but is able to save. This builds a strong basis for more positive  anticipations for the growth because 70% of EU’s economic activity happens  inside the EU. There are two questions for Europe: energy and defense forces.

Another change is that the USA is now independent of foreign energy sources. This has given a boost for the business in form of lower energy costs than in other parts of the world. On top of that the nation is also growing in number of inhabitants unlike Europe or Russia. The economic activity is growing and new jobs are created. The USA is less dependent on exports than other nations, so the growing economy will be a kind of self sustaining motor that will also attract foreign companies to invest in the USA. The lesser energy is imported to the US the better the foreign trade balance that might turn to positive in the years to come due to anticipated exports of gas. Maybe a bit surprising insight I have is that the USA must get Mexico and other nearby countries in the south stabilized so far that the neighbor country Mexico would get a strong growing middle class. This would have a huge impact for the growth and stability in the USA as well.

The third change is the weakening economic influence of China. The Asian giant is still growing at at a rate of 7 % p.a. However, China’s growth is not anymore coming from exports at large but more through growing consumption and imports. That will be the trend for coming years. Many local infrastructure projects have been financed by local “shadow banks” that have lent money to local governments bypassing regulations not to borrow from banks. On top of this the environmental conditions are very bad – the air, water and food quality is questionable at many places. There are many important projects to improve the situation that is a business opportunity for some western companies, but the time is flying and people must make individual decisions what they will do. There are also two other factors that concern me: there a plenty of empty buildings where no one is moving in, and the stock market values. The energy supply is also causing some headache for the future – in a way a similar question like the Europeans have.

The fourth change is coming from the political and military arena: Russia wants to play a stronger and harder than in the past. The economy of Russia, however, is not supporting this for longer periods unless the price of oil and gas would rise and/or some nature catastrophe would cut the USA off from the political and military arena. Russia needs an update of everything – now they are updating only their military. That will certainly put them stronger to the arena, but what can be gained at the end by that? At least this will force Europeans to build up stronger defense forces. Russia is the largest nation measured in inhabitants in Europe, but economically with a GDP of 2014,8 bn USD at the level of Italy. Per capital that looks then much worse for them. Russia is certainly a player also in Asia with their natural resources and military power. The Russian government wants to force foreign companies to invest into manufacturing in Russia by demanding local content of production value to be over 50%. This is valid for strategic fields like energy, military, motor vehicles etc. This might bring some positive activity into the country, but the government should make it sure that the companies can develop and grow on a long/term basis. When that can be guaranteed there would be some hope for a better future.  The currency value has dropped 30% since 2012 and will anyhow make it difficult for foreign companies to sell in Russia. For a long-term development of the country it would most likely be better to improve the living standard of its citizens and the infrastructure including roads, railroads, health care, etc.

There are more of this kind of interesting developments, but as a conclusion of these short comments I can say that the USA will keep on growing now and become economically healthier day by day, but must take care of its south neighbor Mexico; the EU is stabilizing economically and must start to build up its own military power – will that happen without a deeper political union under Nato or not will remain to be seen – my guess is that the EU will do it on its own anyhow; Russia will put more power behind its military and will push for south although they should develop their country and make sure that the middle class could grow and prosper; Chinese must invest in China and will have less growth than in the past, and they will use their foreign exchange reserves to buy more companies abroad to  ensure the access to the markets in the west and to the technology. The risk of trade barriers is now higher than in the past. However, the negotiations between the USA and EU might lead to a better situation in the future.

There is hope for economies to grow, but risks of man made troubles – looks very much like the human history…