The Rise and Fall of Nations in today’s context Part I
This piece contains my observations of how the rules in Ruchir Sharma’s book ‘The Rise and Fall of Nations’ are valid even in a post-Covid situation amidst high-interest rates and a couple of raging wars.
In this part, I aim to cover global trade and consumer spending, so jumping right into the mud.
Though there was a massive dip in trade during COVID-19, some may argue that we have attained pre-pandemic levels. This is true for the most part as we can see from the graph below.
However, this boom seems to have come to an end. This trend can be corroborated by the dip in 2022. The graph below indicates the export of Intermediate goods through the quarters of 2022. We can notice a sharp decline. According to the World Trade Statistical Report.
World exports of intermediate goods (IGs) — inputs used to produce a final product — fell from a 9 per cent year-on-year increase in quarter 1 of 2022 to a 10 per cent decline in Q4. In value terms, they remained stable compared to 2021, amounting to US$ 9.7 trillion. Weakness in the exchange of industrial inputs in supply chains was largely due to a 0.3 per cent decrease in exports of manufacturing supplies, parts and accessories, which represent more than 85 per cent of IGs. Food supply chains remained the most resilient sector, with a 15 per cent increase in 2022.
The above decline is interrelated with the rising interest rates through 2022. As consumers dip into their savings to pay bills, this trend of reducing imports will only continue to get worse.
Let’s take a slight detour and have a look at the growth of US consumer credit card debt.
Now let us take a look at some of the possible reasons for this surge in debt.
- Increased spending after the lack of so during Covid
- Increased prices of goods due to inflation
- Customers carrying larger balances due to increased interest from credit card companies on the back of rising interest rates
Average credit card interest rates stand at nearly 21%, Bankrate found last week. That figure is up from roughly 16% at the outset of 2022.
- Consumers take out additional loans at higher rates to pay back existing debt
credit card spending is definitely up, but it’s not clear that a lot of Americans are having harder times paying off their balances. WalletHub says that credit charge-offs rose almost 12% in the April-June period compared to last year but that the overall rate of charge-offs is just 3.38%.
- Student loan payment pause ends — This means that students haven’t paid higher interest rates yet and will suddenly be exposed to a much larger interest, making it much more difficult to pay up.
The pause on federal student loan payments ended Sept. 1. They were paused in March 2020 because of the pandemic, and the hold persisted for 3½ years.
Now linking this credit card spending with inflation, going forward people will be more wary of spending since they have already run through their savings accumulated during Covid. Couple that with the rising interest rates and thus their rising debt and this brings us to a standstill. Either people will reduce spending thus leading to a reduction in interest rates — demand will reduce and supply stays the same, implying the cost of the product comes down — or there will be a massive spike in the write-downs of credit card debts which will further put pressure on the companies and bond markets — the companies will book the loss and thus will struggle to repay their debt.
In this piece, I delve into the US and China relations and assume they act as a proxy for global trade. This is because these nations are 2 of the largest trading nations (exports and imports). Tensions between these 2 nations can have diverse effects on the world trade.
Now coming back to global trade. The Taiwan standoff has been a topic of debate. This not only revealed China’s intentions but also its military and technological advancements. Even though the US has the strongest military in the world, it felt threatened by China’s rapid catch-up. The US in response has stopped exports of GPU chips to China which I consider a commodity in today’s interest. Apart from this, there has been a big dip in US imports from China, one of its largest trading partners, as seen below.
This move away from China further caught my eye when I saw this news.
Walmart is importing more goods to the United States from India and reducing its reliance upon China as it looks to cut costs and diversify its supply chain, data seen by Reuters shows.
The US diversification away from China has further paved the way for other countries/companies to follow suit. As we all know Apple has started producing phones in India, where it was originally only assembling them and the Walmart example also proves my point. Even though I have given a few examples in India, this trend is picking up among other emerging countries such as Vietnam, Indonesia, Mexico and Bangladesh to name a few. While this might take a while the point I would like to highlight here is the reducing global trade as a result.
Fitch Ratings forecasts global trade growth of 1.9% in 2023, a sharp reduction from 5.5% in 2022.
Today’s scenario is still consistent with the book which points out that after the 08 crisis, global trade is growing slower than the global economy.
The graphs below further strengthen my case of sluggish at best or declining global trade.
The CIS region consists of countries such as Russia, Belarus & Ukraine. Armenia, Kazakhstan, Azerbaijan, Turkmenistan, Tajikistan, Uzbekistan, Moldova and Kyrgyzstan. While yes, the trade stats for the US and Asia have shrunk considerably as the quarters progressed, the major outlier we see in these graphs above is from the CIS region. This is where the war comes into the picture. Ukraine supplies the world with wheat and Russia with energy in terms of natural gas and oil. Sanctions on Russian oil and other goods have massively impacted global trade leading to steep energy prices in Germany(one of the largest importers of natural gas from Russia), where energy is used to heat homes and shops during the harsh winters. Ukraine naturally reduced its wheat exports due to the war. These are some of the factors that attributed to the sharp decline in trade in the CIS region during the war.
Even though I did paint a gloomy picture when it comes to global trade, a trend that has been on the rise after COVID-19 is travel. What is surprising is that this trend is still playing out in a recessionary environment. I’ll come to the recession a bit later in the post(or series of posts). For now, let’s set our eyes on travel spending. The graphs below indicate the strong trend of a booming travel industry.
If you still don’t believe me go check Indigo’s latest results. Airlines and hotels are reporting profits. I believe there are a few reasons. First, maybe revenge tourism because people haven’t been able to travel as much since the pandemic and a way to spend money saved during the pandemic. The second can be the outflow of students who aim to study abroad and their plans may have been delayed by the pandemic. The third can be attributed to the increased spending on experiences as maybe people think that travelling is only going to get harder going forward. The likely reasons might stem from sticky inflation and rising unrest across the globe.
The onset of leisure travel as part of budgeting is becoming the norm worldwide. The global travel trends report from American Express gives us more insight into this rising trend. The report suggests that people nowadays prefer to visit unknown vacation spots and treat travel as a way to completely immerse themselves in the local culture thus attaining the most authentic experience. In light of this many tourists would likely shop at small businesses supporting the local community rather than looking for cheaper alternatives which may not align with their travel expectations. Social media has also been seen to play a huge part in tourists picking their vacations. Gen-Z and millennials are the most influenced when it comes to picking locations that allow them to recreate their favourite scenes from their favourite TV shows. Culinary experiences and immersing themselves in nature are also seen as high priorities during a vacation. This again aligns with tourists preferring authentic experiences and appreciating self-care in today’s multi-tasking and hectic world. Experiences such as private beaches, and premium spas are the most sought-after to detox from the digital world.
A trend that I found surprising was that India and Mexico, 2 developing countries, were on top of the table when it came to such experiential experiences that supported the local communities. The demand for such premium experiences is only going to grow stronger as these countries and their economies grow.
Note: I have written this piece considering the US consumer and their spending habits or lack thereof have effects that trickle down to emerging markets. Other developed countries also closely mirror the US due to their investments in US bonds. Outside of this US consumer data is easier to obtain and the US is the largest importer globally. All the references to the images are mentioned in the captions of the same. The quotes have references attached to the first word or first few words in the form of hyperlinks. A way to identify such texts is using the underline below such words.
