Robert Baur, Executive Director and Chief Global Economist of Principal Global Investors

The US: “slow but steady growth”

The economist suggests that while the world economy will depend on, among other factors, the impact of Brexit and the elections in the US, emerging countries, including a number of South American nations, have a significant chance to revive global growth.

Following his visit to Chile in June as part of the meeting, Emerging Countries: The Challenge of Improving Productivity, organized by Principal Financial Group, AmCham Chile and Cuprum AFP, which took place prior to the United Kingdom’s vote to leave the European Union (EU), the Executive Director and Chief Global Economist of Principal Global Investors, Robert Baur, discussed the international economy and the possible effects of Brexit.

With a relatively optimistic view of the economic outlook, he anticipates that the US economy will continue to experience slow but steady growth.

– Can you see a complete recovery of the US economy, in the medium term?

– You are beginning to notice slow but steady growth. The oil price collapsed, the dollar rose greatly in value and investors had a bad outlook during the second half of 2015 and the beginning of 2016. This spooked investors, but the economic pace has resumed. The real estate market is gaining strength, wages are rising and the purchasing power of families is returning; spending is up and expected to grow by 2% by the end of the year, which is the same as at the beginning of the financial crisis in 2009.

– What will happen in terms of unemployment?

– It has fallen from 5% to 4.7%. This is not a terrible figure and is essentially the result of the labor force being restricted. Unemployment grew from 125,000 to 130,000 in May, but this gradual change is due to fewer people actively seeking work.

– What impact might the election of Donald Trump as President have?

– If he continues with the anti-free market rhetoric of his campaign in recent months, the results could be negative. The same will happen if new taxes are introduced or if too many restrictions are placed on the country’s economic partners. However, if he agreed to work with Congress to eliminate unnecessary regulations, there would be improved economic growth.

– What might be the effects of Brexit on the European Union’s economy?

– Initially, there will be a great amount of uncertainty, meaning that the pound sterling as well as the euro could fall, in addition to the Chinese renminbi, since the British market is the main economic partner of China. In contrast, the dollar and the Japanese yen could well rise. Furthermore, UK exports could be affected because there may be greater restrictions on trade with the EU. It must be remembered that the British economy was greatly strengthened thanks to the bloc, due to the free movement of people and goods to and from neighboring countries and without export restrictions. However, the main consequence could be to incentivize other countries to leave as well. The issue has been discussed in the Netherlands, and if others indeed follow suit, it could destabilize the entire global economy.

– If the UK leaves, what will the role of Germany be in the EU?

– Germany is clearly one of the leading economies of the EU and it should play a more prominent role. Its unemployment rate is 6%, a record, since a figure like this has not been achieved since German reunification in the 1990s. On the other hand, the real estate crisis is being handled well, house prices are rising along with wages, and things are going smoothly in the European economy.

– What might be the main concerns following Brexit?

– Firstly immigration, because strong countries like Germany are doing well in terms of employment, but in Greece, whose unemployment rate is still very high, it is a problem. The outcome would depend on each individual country. Secondly, the measures taken by Brussels.  Clearly, people would like greater influence inside the regulatory body that is the European Parliament.

The China effect

– Regarding Asia, do you think the package of stimulus measures introduced by the Chinese government in response to the downturn is sufficient?

– In the last 35 years, China has achieved close to 10% economic growth; its investments have increased significantly, some of which have created a surplus. Others, however, have been financed by debt, which is huge and has grown to a far greater extent than the economy itself. Today, further steps cannot be taken, other than to stabilize the debt, and it will not simply disappear; it is here to stay.

– What happened to the promise of the emerging nations? From the BRICS (Brazil, Russia, India, China and South Africa) we have moved on to the TIKS (Taiwan, India, Korea and South Africa)…

– We have already seen a boom in the last 15 years, especially in China, but after an economic boom there are always consequences. The result? People become euphoric, they apply for loans and then it proves necessary to see how to make sense of the results of the boom. We will have to wait and see.

– Which countries are possible candidates for improved performance over the next two or three years?

At the global level, the Indian economy could continue to thrive, with reforms of the country’s political system underway. The same is occurring in Chile, as well as in Argentina and Mexico, who are experiencing growth on a par with the United States and Peru, given the recent changes implemented such as lower taxes and fewer economic restrictions. The Philippines can also be added to this list. These countries should continue to enjoy ongoing growth.

– You mentioned Chile as among the new, well-performing economies. On what should the country focus in order to secure economic progress?

– The main priority should not be to depend on exports, using instead some of these resources to begin manufacturing. The work of the government now is to incentivize innovation, investment, reduce taxes and have an independent judiciary, providing an environment in which people can feel more free and comfortable. Only then can you have a better quality of life which, in turn, will benefit the economy.