Homer Alaska - Business

Story last updated at 1:33 PM on Wednesday, March 14, 2012

Emerging markets will drive economic recovery as U.S. struggles with its debt

By Andrew Jensen
Morris News Service - Alaska

With mixed economic measurements in the U.S. and the continuing eurozone debt crisis, emerging markets will drive the world economy in 2012, according to analysts at Wells Fargo.

At an event Feb. 21 hosted by the Petroleum Club, top executives for America's largest bank pointed to continuing signs of empowered consumers in nations such as China, South Korea and India as a global growth engine with the developed Western world grappling with high unemployment and burdensome debt loads.

Although the United States has some tailwinds with growth in gross domestic product of about 3 percent, strong corporate earnings and balance sheets, and an improving job picture, rising oil prices caused by a weak dollar and Middle East turmoil has Wells Fargo anticipating $5 per gallon gasoline and the potential for oil prices approaching the record $146 per barrel prices seen in 2008.

Unlike 2011, when GDP growth improved each quarter, Wells Fargo Senior Vice President Jeff Savage suggested growth could trail off by the third and fourth quarters this year. The unemployment rate, which recently dipped to 8.3 percent, also could rise again as people who haven't been looking for jobs rejoin the labor force.

The labor participation rate is at its lowest point since the recession of the early 1980s. If the American workforce were at the same size as it was in 2008, when the recession began, the unemployment rate would be 9.5 percent or higher, Savage said.

Another headwind for the U.S. economy is the housing market, which is still bumping along looking for a bottom in prices. Savage said there are signs of some stabilization on prices that is needed before a recovery can occur, but like unemployment, there are huge numbers of unoccupied homes that aren't on the market.

As housing markets improve and those homes come back on the market, inventory will rise and again put downward pressure on prices.

The 2012 elections also will play a role in the future of the U.S. economy as the $15 trillion debt and $1.5 trillion annual deficits must be addressed. Savage said that no matter who becomes the next president, "taxes are going up."

Nevertheless, the United States remains the world's safe haven for many investors, which has kept interest rates manageable on the debt the country has added since the 2008 recession.

Global Investment Officer Sean Lynch said China is trying to diversify by purchasing gold, and did sell off some U.S. Treasury notes last year for the first time.

The national debt has grown by more than $4 trillion since the beginning of the recession, but a nation flush with cash such as China has little options for where to put its money.

"The reason they hold a bunch of our debt is because they have nowhere else to go," Lynch said.

U.S. Treasuries are the world's largest bond market, followed by Japan. The third-largest is Italy, and Lynch said to watch the interest rate for 10-year Italian bond for signs of trouble.

"If it gets to 6 percent, 6.5 percent, anything above that becomes real burdensome," Lynch said. "Watch that one number. It's going to be a key thing."

The eurozone is trying desperately to contain the Greek debt crisis and prevent the contagion from spreading to Portugal, Spain and throughout the continent. One positive coming out of Europe lately, though, Lynch said, is talk of growth after years of austerity measures.

Emerging markets did not perform as well as in years past in 2011, leading some of Wells Fargo clients to wonder why the bank is still bullish on the developing world.

Lynch said emerging markets exercised some tightening measures last year in response to worries about overheating economies, but there has been some easing this year.

"The reason (we like emerging markets) is demographics," Lynch said. "There's a very young population, very fast growth and very low debt loads from a sovereign standpoint. There's been a lot of easing across the emerging world. They respond quickly to any kind of stimulus. That's one reason we're strong on them."

Noting recent travel around Asia, Lynch described a scene on a Thursday night in Seoul when he counted at least 18 people standing in line to buy $4,000 Louis Vatton handbags.

He also noted Yum! Brands, which includes Pizza Hut, Taco Bell and KFC, had same-store sales growth in China of 20 percent last year compared to 1 percent in the United States.

Yum! Brands has plans for 600 new stores in China alone in 2012, and Lynch said investors should look to "good old-fashioned multi-national corporations with emerging markets exposure."

With demand slowing in Western economies, China is looking to boost domestic consumption as a means to continued growth. Lynch cited the ongoing urbanization efforts that will bring millions of citizens into cities and raise incomes.

As labor costs increase, China may lose some of its edge as a low-cost producer, and Lynch noted that manufacturing is moving to southeast Asian nations such as Cambodia, Vietnam and Myanmar.

And as the yen appreciates, some jobs from Japan will migrate back to the U.S., especially as fuel costs rise and offset lower labor costs, Lynch said.

Andrew Jensen is a reporter for the Alaska Journal of Commerce.