On a recent trip home, I appeared on Business First, a regular show on the Sky Business Channel. The topic was China and the impending impacts of their economic slow-down. Quickly, however, the tune changed to the US economic environment and substance (or lack of) to its recovery.
Most would agree that the US is far from out of the woods. In fact, some might think the worst is yet to come. Although I don’t share such a dire view, my return to North America this week reminded me just how difficult the healing process will be and that the recovery will be very much a state-specific issue. You see, unlike Australia, America relies on a broad range of industries. Earnings are largely kept at a state level and are not easily shared with lesser performing sectors of the economy. Federal taxes on the wealthy are virtually non-existent (something Obama is trying to change), so the overall economy benefits little from booming sectors, which are location dependent. Any headway made by booming areas of the US economy may take decades, if ever, to filter through to less prosperous locations. Never has this situation been clearer.
Areas such as Atlanta, which recently felt the brunt of the financial hurricane called the GFC, is already bouncing back due to its technological capabilities and business-friendly environment. Housing supply is approaching more manageable levels and average incomes are on the rise. San Francisco is in a similar position, with the technological boom and large amounts of venture capital seeping into the Northern California hotspot as investors look for the next Apple, Google, or even Instagram….
When visiting these areas one could be forgiven for thinking that the US is not in such a bad position after all. But a visit to the once-booming industrial states reveals the reality of the fateful change that started in 2008. Empty factories, soaring unemployment and bottomless house prices are just a few of the stark reminders that this is much more than the ‘two-speed economy’ we refer to in Australia.
It’s debatable how much the mining sector contributes to Australian GDP. Some say very little, some say it’s as much as 20%. Whichever figure you choose, there is no denying that the Australian mining sector affects the overall economy in more ways than we can imagine. Business-to-business transactions, the flood of otherwise non-existent export dollars (despite the value of the Aussie dollar) and the tax revenues that flow back to Canberra and then out to the regions are all factors that buoy the Aussie lifestyle.
Australian Dollar vs US Dollar July 2012
click to enlarge
We are a fortunate nation (or lucky country, if you prefer). There’s no doubt about that. The government likes to credit their prudent policies and fiscal management for positioning the robust economy just three years down the track from the GFC, but our strong economic position is due to a number of factors, not least the actions of previous governments.
There are flickers of life in America. Prudent investment choices will reap great rewards but the same issues still plague the global economy. America, even in its bruised state, still offers some of the best investment opportunities in the world today, although not without risk. Australia is not immune, by any means, but we are better placed to stave off a Northern Hemisphere downturn. Should China experience a downturn however, Aussie investors may hit the panic button.
Diversify wisely, your future depends on it…
Stay Ahead of the Game,