By: Sam Orman – Finance & Business Economics
Editor’s note: This version of the article has been edited for online content and differs from the version printed in the Nov. 17 issue of Flyer News.
The global financial market recently has been shaken due to weak economic activity, geopolitical fears and health concerns (Ebola). This weakness has permeated to countries like Germany and Japan, which earlier looked most poised to drive global productivity.
Germany has revised gross domestic product annual growth rate expectations from 1.8 to 1.2 percent for 2015. Minister for Economic Affairs and Energy Sigmar Gabriel blames slower export growth as the reason for this downward revision, on top of geopolitical risks and global economic problems overseas, according to an Oct. 14 article in The Guardian.
While Gabriel does make valid claims about the general weak economic growth prospects, he neglects to acknowledge that Germany’s growth remains driven by global consumption. After World War II, Germany became an exporting powerhouse because domestic consumption remained stunted from wartime conditions. The country pursued global buyers to purchase excess supply: this allowed increased productivity and led to economic growth.
Essentially, Germany could expand exporting sectors without consuming baskets of goods. Developing nations instead provided easy credit (lending) to emerging economies, allowing those countries to buy the goods produced by Germany. Those emerging economies, however, now run large trade deficits and lack sufficient infrastructure.
The negative long-term implication of deriving growth from trading partners is that Germany has broadly exposed itself to the healthiness of the global economy. When growth remains weak, these trading partners can’t purchase as many goods. In addition, non-tradable sectors (retail, hotels and infrastructure) lack innovation and non-domestic competition, rendering these industries inefficient with their resources.
Now, why does this all matter?
America is the engine that drives the global economy. Despite all of the global growth worries, the U.S. corporations continue to surpass earnings estimates.
Bloomberg, a company that tracks financial data, reported as of Oct. 17 that earnings have been four percent better than expected with revenues exceeding expectations by a percent.
External fears aside, the fundamentals of the U.S. market remain attractive.
The real competitive advantage of the U.S. lies within its arm’s length financial system, when the relationship between banks and companies in need of funding is more competitive and transparent as opposed to the European model of long-term relationships where banks accept less profitable results in the short run.
European companies only receive the necessary capital when they’re connected to large banks, making entering industries for small companies more difficult. This lack of new competition leaves little incentive for companies to innovate and improve preexisting processes.
The U.S. system demands financial deliverables, meaning companies that perform poorly lose their funding, whether they’re publically or privately traded.
Investors want to constantly assess performance in the American system. Although this seems ruthless, the model demands innovation, profitability and increases efficiency.
Rajan Raghuram, the federal bank president of India, said in his book, Fault Lines, the American model is supported by weak safety nets that demand nimbleness of the workforce and increasing skill sets of the labor force.
And, this results in a comparative advantage for American companies over European and Asian companies.
We, undergraduate students, will be forced to increase our skill sets after graduation and must accept adaptation in the workforce as the new norm. Previous generations remained within occupational roles, on average, longer, but we have to expect increased mobility and less job security.