Private household consumption is weak among most western economies. While this might only be a temporary situation for some of them, other nations are faced with a structural adjustment of consumption.
For example, consumption has been the main driver of the U.S. economy in the past 20 years with consumers buying and spending everything they could get. This has resulted in a situation where excess consumption was financed by rising asset or home equity prices or in many cases even worse, increased borrowing from credit cards and other sources.
Long-term, this is not going to work and we are now starting to see this situation getting corrected, for many it is quite a painful adjustment. After a huge destruction of wealth in the past two years, many people are only left with one choice and that is savings from their income, provided that they still have an income. We expect this to continue for a number of years, with the share of consumption as a percentage of GDP falling significantly.
So therefore the outlook for GDP growth is very bleak you might say, right? Not necessarily, we think. Falling consumption spending can be compensated by increased investment spending and rising net exports. While we are relatively optimistic on net exports (partially supported by a weak and falling U.S. dollar), we are less optimistic on investment spending. The various economic stimulus packages have in our view failed to address this enough. Economic theory tells us, and historical evidence supports this view, that spending on infrastructure actually can increase GDP longer-term.
It goes without saying that the need for infrastructure spending in the U.S. has been neglected far too long and there is an urgent need to upgrade infrastructure. Did you know for example that the U.S. electricity grid is by far the oldest in the western world? So money would be better spent on such investments that provide the basis for long-term economic growth rather than wasting money on simply redistributing wealth, over-regulating the economy or pursuing ‘pet’ political initiatives.
With the U.S. having the highest tax burden among western economies, taking into consideration income and inheritance taxes, it would be time to completely overhaul the tax system before even thinking and possibly increasing healthcare programs. Increasing financial pain and worries about how to finance increasing healthcare is a common problem among most developed economies. While many people think that the cost for healthcare has reached a level which is unbearable, we think that the costs will continue to grow for a long-time.
The main problems here are changing demographics, improved medical technologies and often wrong incentives within the healthcare system that keep costs rising. Let’s face it, we all appreciate the fact that our life expectancy has grown so rapidly over the last few decades. Now that we have the medical options to not only increase our life expectancy but in most cases also the quality of our life, we are prepared to spend extra money on healthcare.
The flip side of the coin is that we need to be prepared to work more years before we can retire. We see this as the only way to manage surging healthcare costs and pension liabilities.