With all of the media attention focused on the European debt saga over the past weeks (substitute: months, years), it is easy to lose perspective of the big picture. As the domestic stock market has thrived relative to those globally over the past 18 months, I continue to question the merits of the outperformance. One of the most fundamental relationships of the modern economy is the tie between the amount of energy a country consumes and their GDP.
(click to enlarge)
Shown above is a linear regression of PPP-adjusted GDP against the number of barrels of oil consumed daily. For the regression I used countries that ranked in the top 20 for both statistics. As illustrated by the ~.93 R-squared figure, the amount of oil consumed by a country is an excellent way to predict their economic productivity. The relationship is intuitive and could also be illustrated by time-series statistics as the growth in resource usage has paralleled the parabolic growth in economic output worldwide.
Examining the residuals, the United States underperformed the prediction by the largest nominal figure and China outperformed by the greatest. Before going any further, I would like to add a caveat to these results. The PPP adjustment of GDP would tend to favor developing countries in this type of analysis. By adjusting for PPP, goods purchased domestically in these developing countries are normalized to their worth globally, therefore increasing their impact to GDP. What a PPP adjustment can overlook are the import/export dynamics that will be affected if the currency were revalued to the PPP-adjusted price. For example, if workers in China were to require an adjusted wage to purchase the same basket of goods, producer prices would rise and the incentive to manufacture goods there would be diminished. This is not to say that these countries have not been executing on their oil consumption well - they have - but the residuals for India and China are large enough to merit an explanation.
Most interestingly, the residuals of Germany, France, Italy, and even Spain are all positive. Germany has the largest residual of all developed countries and is a good sign of things to come for the country's economy going forward. These positive residuals for EU nations highlight the superior infrastructure in these countries compared to the United States. Rather than a sprawling system of highways, the public transportation and higher relative population density of Europe helps position them to execute more efficiently on their resources.
So how have domestic markets dominated thus far? The persistent 15%-20% spread of Brent to WTI over the past year could help explain GDP growth outperformance. Additionally in America, GDP has been unimpeded by tax reforms or, as is the case in Europe, debt runs. As nominal GDP expands so should asset prices, whether they are based on efficiently executed gains or not. The ever-expanding fiscal deficit in the U.S. will need to addressed at some point and given what seems like a structural dependence on oil, solutions are easier said than done.