Global Economic Update

We continue to believe that we are experiencing a “never-before economy” that is being driven by two huge forces on the planet: t1) the 75 million baby boomers in the United States and 2) the 2.3 billion people in China and India.

We continue to believe that we are experiencing a “never-before economy” that is being driven by two huge forces on the planet:

  1. The 75 million baby boomers in the United States (25 percent of the total U.S. population) that are in their peak earning, spending and saving years.
  2. The 2.3 billion people in China and India (38 percent of the world’s population) that are trying to build themselves a customer class in a semi-free-market economy.

We believe that these two forces are going to be prevalent in the global economy over at least the next several years, pushing economic growth to an above average condition. We can see firsthand confirmation of a growing global economy by watching the prices of basic building block commodities like silver, lead, zinc and copper. The three latter commodities are at or near all-time highs, while the former is currently at a 22-year high.

In addition, the global wealth that is being created, especially in Asia, is being displayed through a 25-year high in the price of gold. Demand for gold jewelry, which represents 73 percent of global demand, rose 12 percent year-over-year through the third quarter of 2005. This is the strongest year-over-year increase since 1997.

In 2005, global economic growth was estimated to be in excess of 4 percent and is expected to only drop to 3.5 percent in 2006, according to the World Bank. What is interesting about this growth is that it is being led by secondary economies like China, India, Argentina, Peru, Russia, Turkey, Kazakhstan and Estonia to name a few.

It is estimated that the economies of the developing world—known by the acronym BRIC (Brazil, Russia, India and China)—are growing at about twice the rate of the major economies in Europe, Japan and the United States. This creates both challenges and opportunities for investors and business in the United States.

U.S. investors are generally shy to invest internationally. The average 401K plan participant currently holds less than 5 percent of their assets in international stocks. This is in contrast to the average pension plan that holds about 15 percent of their assets internationally. It often creates much discomfort for U.S. investors to invest in places not known for their free markets or rule of law. However, this is currently where the strong economic development is taking place. Dollar-cost-averaging and diversification are the best course of action here.

For U.S. businesses looking to expand overseas, it is equally difficult. The firm ABN AMRO and the London Business School ranked countries for their GDP growth for the 5-year period ending in 2004. The countries with the highest compound economic growth rates were Malaysia, Egypt, Philippines, Hungary, Chile, Ireland, India, Pakistan, Russia, Thailand and China. These represent many regions of the world that can present legal, logistical and cultural challenges for businesses to operate.
There are also risks associated with a growing global economy that currently revolve around the issues of “fueling the future” and allocating the new natural resource riches.

Fueling the future refers to the stress that global economic growth is placing on energy. The price of crude oil (the main energy source of the world) has more than doubled since the start of this decade, as world demand has now eclipsed 84 million barrels a day. In addition, the major sources of global oil supplies are located in parts of the world often mired in turmoil. We suspect there will continue to be stress on the price of oil, as long as above average global economic growth persists, unless the price goes so high that it causes a global recession.

Allocating the new natural resource riches brings political risk into a robust economic environment. How the leaders in Russia, the Middle East and South America use their newfound wealth from natural resources will play a primary role in determining how calm the global geopolitical environment stays. If leaders focus on enriching themselves or pursing expansionist policies, turmoil could surface. If, on the other hand, leaders focus on building infrastructure and lifting living standards in their countries, a better global geopolitical and economic environment would ensue.

The global economy is much too established to be unwound. Business and investors should pursue opportunities in a prudent and diversified manner. The challenges are there, but so are the potential rewards.

This article is reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.