2013 Economic Trends

2013 is set to be a crucial year for a lot of countries, with Obama starting a tough second term at loggerheads with the Republicans over the Fiscal cliff, Europe implementing a set of reforms that could spark the end of the Euro crisis and China’s new leaders hinting at political reform in a economy that could overtake America in a few years. But some more important long term trends are also starting to take effect, which could change how the world economy works.

Hu Jintao’s new reign as the leader of China has sparked talk of political reform. 

One sector where big change is taking place is in manufacturing, where the location and tools are set to transform. For the latter the trend over the last decade has been for manufacturing jobs in the West to be outsourced to China. The Chinese labour force were willing to work for a fraction of their Western counterparts salaries, boasted colossal human capital and had a very underrated infrastructure that allowed for such goods to be transported quickly and efficiently. This helped fuel China’s lightning growth which has seen it transform from a developing country to a developed country in record time. But this has also seen a middle class emerge in China that has new demands. More emphasis now needs to be placed on the service sector for the economy to keep expanding at the same pace, as China’s grip on manufacturing is no longer as tight as it once was. Wages in the sector have been rising in the country, at around 20% a year, while China’s currency that had for so long been artificially kept weak, has been allowed to appreciate in the last few years. It now faces competition from its regional neighbours, as Vietnam and Bangladesh boast low cost workers waiting to be exploited by firms. But these countries don’t possess the same supply lines and pure number of workers as China, making them less serious rivals. Instead China’s biggest rival now lies below its biggest customer. Mexico is an attractive option for firms with its competitive costs (lower than China’s), large supply of workers and close proximity to America. The nation has come a long way, improving its infrastructure and enforcing its laws to a much higher degree than it did a decade ago. Of the $19.4 billion it gained in foreign direct investment in 2011, around half was gained in the manufacturing sector, while it has become the second largest supplier of electronic goods to the USA. HSBC even predicts that Mexico will overtake China and Canada as the biggest exporters to the USA by 2018. So next time you buy a product, you might not be surprised to see it originated in El Mexico.

Mexico’s PMI – which measures manufacturing output e.g anything over 50 is an increase and anything under is a decrease – has increased impressively over the last year. 

The second big change to the manufacturing sector which could kick off this year is the much heralded 3D printing. The ability to replicate products without fault could dramatically change the manufacturing sector just like robotic machinery once did. It could displace a lot of workers, as the need for humans to graft products would no longer be needed. Instead there would only be a need for employees who could operate the 3D printers, reducing the labour force considerably. That would have the knock on effect of reducing the need for out-sourcing (already on the wane) as the cost of manufacturing products would no longer depend on the wages of the local population. Instead it would make far more sense for 3D printing factories to be established in the home markets of the Western world, so that goods could be delivered fast and have access to modern technology far easier. The “ink” needed could also be very cheap for some products, as old products could be recycled to create the base materials for the 3D printed objects. While printing unique products for different customers would be rather easy, allowing for more artistic licence without the usual added costs. Alas, 3D printing is not yet ready for mass production, while some products would indeed remain cheaper to make from scratch rather than printing copied versions. But this could be the year it kicks off, as most of the ingredients are ready for factories to start trialing 3D printing in producing goods. 2013 might be the year where replicating products was proved to be viable and yet another nail in the coffin for the 20^th century manufacturing techniques.

The final economic trend for 2013 will be the battle between austerity and stimulus that has been building up since the financial crisis. Stimulus packages were the order of the day initially after the crisis to help economies lift themselves out of recession. But austerity then took over as governments looked to try and gain control over their inflated debts and deficits. Nowhere more than Europe has austerity been so devoutly defended, with Germany and the EU enforcing tough austerity measures upon the countries that received bailouts. This has had mixed success though, with Greece clearly in need of controlling its debts, but the likes of Spain actually rather in control of its finances until it started to implement poorly thought out austerity measures. At the end of the year, one of bailed out nations, Ireland will return to the bonds markets, after managing to return to a current account surplus and get its economy growing in 2011 and 2012. Ireland remain the model case for Austerity in Europe; after requiring a bailout in 2010, they have implemented tough austerity measures and repaired their economy (despite a still high budget deficit), so a return to the bond market would help prove austerity works when implemented well. But they remain the only working example right now, with most countries contracting badly from austerity measures, with Spain still not expected to exit recession this year. On the other hand, some countries have turned to stimulating their economy instead, banking that the resulting uplift in the economy will outweigh the debt added and help pay it off in the long run. For example Japan have recently announced a stimulus package equivalent to $116 billion, to try and lift the economy out of recession by spending government money on improving the country’s infrastructure; which provides jobs and also attracts businesses to the country. Critics suggest the money won’t be spent efficiently, while the stimulus package will only add to Japan’s considerable debt, already at 200% of GDP. But they aren’t the only country that have thought to spend their way out of their debts, with China and Brazil both launching stimulus packages last year to help reignite their economies after falling world demand for their exports. Maybe the best example to use is the USA, who largely ignored their considerable debt during Barack Obama’s first term (actually adding trillions of dollars onto it) but are now being forced to consider austerity. The looming fiscal cliff at the start of the year would have forced through considerable cuts in America budgets equal to 5% of their GDP, instead Obama and Congress were able to come to a short term solution to avoid such measures. But the debt ceiling must be re-negotiated soon and the long term problem of America’s rising medical costs must be dealt with sooner or later. This means America will be looking to implement austerity measures to help deal with their rising debt this year, probably with a mixture of spending cuts and tax increases if the democrats and republicans can ever agree. So if a conclusion is to be reached this year over Austerity or Stimulus in the battle to control countries debts, then America may be the deciding vote. If austerity can help America bring down its budget deficit and public debt, without tipping the economy into recession, then it might just snatch the win.

More talks like these are to be expected as America looks to battle its debts by enforcing austerity measures. 

 

2012 was an eventful year, containing the Olympics, the election Mr Hollande as France’s first Socialist President in decades, the election of Mr Morsi in Egypt as the Muslim Brotherhood’s first big win in an election, the re-election of Mr Obama  in the USA and the first example of a private firm venturing into space in the form of SpaceX. 2013 will have a lot to live up to, but if these trends prove correct, then it could prove just as eventful (hopefully minus an apocalypse this year).

North Korea’s New Years Resolution

Kim Jong-un delivered a rare public speech on New Year’s Day, the first of its kind in 19 years. Among the usual calls for North Korea to remain a strong military power, there were also calls for North Korea to become an “economic giant” and signs that they could be looking to repair ties with neighbours, South Korea. This could be in the form of a much less restricted economy, which would allow for a lot more trade and investments to pour into the country. Recent reports in Germany are even suggesting that the regime have hired German economic and legal experts to help plan for an opening up of the economy. These reports have suggested North Korea will follow Vietnam’s model, with specific companies chosen for investment.

This seemed impossible only a few years ago under Kim Jong-un’s father (who passed away a year ago), as North Korea has been the most secluded country in the world. Its people are heavily controlled by the government; entry and exit from the country are extremely hard to come by, information is censored so much that the public knows little about the outside world and human right violations are common especially in the prison system. Alongside this the country is relatively broke, relying massively on the financial support of China and aid from South Korea and America to feed its people.

Leaving North Korea can prove a little tricky…

This is the where cynics are worried about Kim Jong-un’s motives. North Korea have made promises to stop nuclear weapon development in the past to help attain food aid from America, only to then renegade on said promises afterwards. North Korea are again in such a position with masses of their population starving, so critics are arguing Obama shouldn’t fall for such tricks again. To add insult to injury, North Korea launched a rocket on the 12 December to put a satellite in space, despite violating clear UN rules. The rocket showed the progress North Korea are making in creating Nuclear weapons, though there are no signs of the re-entry technology needed, let alone the capability to attach a nuclear bomb. Such actions betray the words of unity Kim Jong-un delivered in his New Years Speech.

North Korea’s missile range, as found on the Economist.

Yet the timing is good. Kim Jong-un has just completed his first year in power and looks a more passive figure than his father. He has the chance to change his countries fortunes and is still in the infancy of his reign, which is important because as times passes by the chances of Kim Jong-un changing the regime that so many deplore will diminish. Alongside this, South Korea has just elected a new president, the conservative female Park Geun-hye. This means the departure of Lee Myung-bak, who was a particularly hated figure in North Korea, and the start of a new more welcoming government in South Korea.  President Park’s stance has been a halfway point between optimism and pessimism, stating that her agenda is to start with some small projects between the two countries and then see how Kim Jong-un reacts. If he follows his own speech then more unity between the two countries could begin.

South Korea’s first female president makes it onto the Times Front cover. 

This would be extremely important to North Korea’s chances of success in opening up their economy, as its neighbours have been extraordinarily successful in expanding theirs. South Korea was one of the poorest countries in the world in the sixties, now they are ranked in the top 20. They are in fact the only nation to have gone from being a major recipient of aid to a major donor. If North Korea could gain access to such a lucrative market, then they could revolutionize their economy.

In 2011, South Korea were the 15th largest economy in the world in nominal GDP terms. 

If they needed a model to follow then they should look no further than Myanmar. The nation was in a similar situation to North Korea only a couple of years ago, with little hope for change in the future. But as quick as you click your fingers, Myanmar have begun dramatic reforms to their country; opening up their economy, relaxing press censorship and even freeing the pro-democracy leader Aung San Suu Kyi. These reforms have seen improved growth for Myanmar, with its leaders now aiming to triple GDP per capita by 2016. North Korea on the other hand saw GDP shrink by a half in the 90’s, with little or no recovery since. By opening up its economy, North Korea could see real growth just like Myanmar, which could help lift a large proportion of its people out of poverty over the long run.

This graph found at the Washington Post, shows South Korea improvement and North Korea’s stagnation in GDP per capita terms. 

Alas, this is just hopeful talk right now. If the north and south were ever to unite truly, it would cost the richer south a lot of money and time to integrate the deprived north – just look at the re-unification of Germany. While South Korea are more likely to be worried about North Korea’s nuclear weapon ambitions, with the two countries still technically at war and the country the most likely target of any attack. This makes Ms Park’s stance more understandable, as she remains cautious on fully accepting North Korea yet. For the same reasons America will remain weary to invest in North Korea if they did open up their economy, as the money could be directed into Nuclear Weapons development. All this also ignores the current UN sanctions on the country because of their continued violation of international rules. This puts the opening up of North Korea’s economy beyond just their control.

A New Year and a new leader could see the development of a new North Korea. But by continuing along the path to Nuclear Weapons, they could be shutting off the path for economic freedom.