Japan and United States bright spots in subdued global outlook

THE recent G-20 meeting of finance ministers in St Petersburg confirmed that the debate between growth and austerity is over — at least for now.

With protracted recession in Europe and slowdowns in emerging markets, concern about budget deficits has given way to apprehension about growth. In July, the IMF revised its global growth forecast downward for the second time this year.

Japan and the United States stand out as bright spots, but for different reasons. In Japan, prime minister Shinzo Abe has unleashed a combination of aggressive monetary and fiscal expansion along with promised reforms of the labour market, corporate governance, regulation, and trade.

In response to rapid and bold stimulus measures, Japan’s economy is expected to grow at a rate of around 3% this year and the Nikkei index rose 80% in the six months ending in May. Now Abe has signalled his intention to move forward with tough structural reforms. If he delivers, his policies will be game changers for Japan.

In the US, the story is one of continued recovery as the headwinds slowing growth dissipate. State and local government budgets are improving, the housing market is strengthening, and households are repairing their balance sheets.

Counter-productive and excessive fiscal austerity at the federal level has dampened growth this year, but the private sector has proved more resilient. Under current law, fiscal contraction is slated to ease next year and monetary policy is likely to remain supportive, so most forecasters predict an acceleration of growth.

But growth prospects could be undermined by another bruising political battle over the federal budget, resulting in deep spending cuts.

Earlier this year, the Congressional Budget Office warned that the potential US growth rate had declined as a result of years of sub-par investment rates, the aging of the population, and smaller productivity gains. Every year of below-capacity growth means lower growth capacity in the future.

A recent McKinsey Global Institute study identifies five mutually reinforcing “game changers” that could have a significant effect on GDP growth, productivity, and employment in the US by 2020: Shale energy, big-data analytics, exports in knowledge-intensive industries, infrastructure investment, and talent development. Two of these — shale energy and big-data analytics — build on ongoing technological breakthroughs in which the US has a strong lead and depend primarily on private sector action, not macroeconomic or structural policies.

US production of shale gas and oil has been growing by more than 50% annually over the last five years and US natural gas prices have declined by two thirds since 2008 and are likely to remain significantly lower than prices in the rest of the world at least until 2020. This price advantage will enhance America’s competitiveness as a manufacturing location.

The US has the largest recoverable shale-gas reserves and the second-largest recoverable shale oil reserves in the world. It also enjoys a technological lead in shale energy technologies, and it already has a vast network of pipelines, refineries, and ports in the energy sector that can be repurposed for shale gas and oil.

Growth in shale energy will mean more investment, production, and jobs in the energy sector itself. Lower gas prices will boost manufacturing production.

Growth in energy and energy-intensive industries will fuel additional demand, output, and employment across a wide swath of supporting activities, including transportation, construction, and professional services. Overall, McKinsey estimates that growth in shale energy could add 2% to 4% to annual GDP and create up to 1.7m jobs by 2020.

Big data and advanced analytics are another technology-driven game changer for US growth.

As more data are generated, stored, and transmitted in digital form, new data sets relevant to personal and business decisions are growing exponentially. As a result of advances in computing power, the advent of cloud computing, and new software tools, more of these data sets can be quickly analysed and used to reduce costs, boost productivity, etc.

Big data and advanced analytics can also reduce costs and enhance efficiency in healthcare and government, and can create value for consumers through greater product variety and quality, as well as enhanced convenience — benefits that are not captured in GDP statistics. McKinsey estimates that big-data analytics could add about $325bn (€245bn), or 1.7% to annual GDP in the retail and manufacturing sectors, while generating up to $285bn in productivity gains and cost savings in healthcare and government by 2020. The potential savings in healthcare costs would ease pressures on government budgets and release resources to boost growth in the rest of the economy.

McKinsey’s research suggests that shale energy and big-data technologies will be game changers with benefits for the economy’s potential growth over the next several years.

* Laura Tyson, a former chair of the US president’s council of economic advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013