Why America Will Be the Next Japan
The media is harping on about how the U.S. is well on its way to recovery. Well, I don’t agree—the country’s economy is slowing. In the fourth quarter, gross domestic product (GDP) growth based on the second estimate expanded at 0.1%; this is above the -0.1% reading in the first estimate, but nonetheless, it’s below consensus, which estimated the economy would grow 0.5%. I’m not sure how the 0.5% growth was arrived at, but the concerns of the fiscal cliff in the fourth quarter clearly made consumers think twice about spending. Of course, the government also saw its spending curtailed due to the debt limit and pending sequester.
I’m not going to spin a good story for you to hear; I truly feel the country is in trouble. The sequester deadline last Friday came and went. The two parties have yet to iron out a strategy to cut the deficit, so the country will face a daunting $85.0 billion in annual cuts for a total of $1.2 trillion over the next decade. Of course, this will have a negative impact on economic recovery in America. The cuts will be focused on the defense sector and Medicare, so as an investor, I would stay away from these sectors. If the jobs market also stalls, I would be careful when looking at housing and retail stocks.
The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce GDP growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these times, the sequestration is needed; otherwise, the ballooning national debt will continue to spiral out of control, only to hurt future generations.
The irony in all of this is that the situation we are seeing unfold in the United States is eerily similar to what has been happening in Japan for the past two-plus decades.
America may be the next Japan. I advise staying out of Japanese stocks for now and sticking with China, Taiwan, South Korea, and Singapore.
While I feel America will face many difficulties on its way to full recovery, it will not be an easy venture.
Let’s look at some of the similarities between the two countries.
With nominal GDP at around $15.7 trillion in 2012 and the current national debt at around $16.6 trillion, the country’s debt-to-GDP is about 105.7%, making it about the 12th-worst in the world, according to data from the Central Intelligence Agency (CIA). By comparison, Greece’s debt-to-GDP stood near 165.3% in 2011, and Italy’s stood near 120.9% in 2011; so you can see how the situation in the U.S. is not good and why cuts need to be made. Japan’s debt-to-GDP was a horrendous 208.2% in 2011. By this comparison, the U.S. is better than these other countries, but it’s still faced with problems.
I have long been negative on Japan. The country’s GDP growth contracted for the third consecutive quarter in fourth quarter 2012, shrinking by an annualized 0.4%, which was well below the estimates that actually call for growth of 0.4%, according to the Cabinet Office. For 2013, the country’s GDP growth is estimated at an optimistic 2.5%, according to the government. The problem is that while I still feel the estimate is way too high, new Prime Minister Shinzo Abe will be aggressively spending to get the country’s economy back on track. What exactly is the problem with this? The spending will add to an already massive debt load for Japan.
For the U.S., the World Bank is estimating GDP growth of 1.9% in 2013, down from the previous estimate of 2.2%. (Source: Grey, B., “World Bank cuts forecast for global economic growth,” World Socialist Web Site January 17, 2013, last accessed March 1, 2013.) GDP growth in the U.S. is not expected to reach three percent until 2015, which means more issues for the country.
The bottom line is: America will continue to face hardships over the next few years, and if Japan is any indication, it could take many more years to resolve.