How to deal with current uncertainties and predict the direction of the economy

Bloomberg Opinion – One way to deal with the current global economic uncertainty is to look for consistent and reliable indicators to help you navigate the chaos. Another way is to focus on some time-honored truths about savings and human capital. In an era of pandemic and financial crisis, these old economic truths are often forgotten.

First, the countries that have it High savings rates Earn compound returns. If they can maintain these high saving rates, they will end up owning large portions of the world economy. Singapore and Norway are two examples of this phenomenon – part of Norway’s wealth comes from the good fortune of its oil.

Germany is another country with a historically high savings rate (although it hasn’t had investment success in Singapore). Yes, Germany faces serious problems: for example a crumbling education system, questionable infrastructure performance, and the risk of deindustrialization due to Chinese competition. However, Germany’s relatively sober saving and spending patterns, including in the public sector, give it some solidity.

The UK is at the other end of this spectrum. Compared to other countries in the Group of Seven (the group of seven of the largest developed economies), the UK has lower rates of savings and gross domestic investment.

This means that A relatively high proportion of its economic activity is financed by foreigners, who earn a significant portion of the compound returns on that investment. This is why London and some other parts of southern England can look so impressive even with modest living standards.

Savings as a percentage of GDP in the G7 countriesSource: Bloomberg via the World Bank(Source: World Bank)

The Netherlands has a similar culture to the UK, but provides more and maintains a more positive net foreign asset position. The UK’s net international position is much less positive and this will become an important factor in the distant future in addition to the Netherlands’ currently high per capita income. One can even argue about causes and consequences, but it is worth noting that it is possible to see run-down cities in the Netherlands much less often than in the UK.

Another country similar to the United Kingdom is Ireland, and the contrast is also beneficial within the country: although Ireland is highly dependent on foreign capital, it takes great care to improve its performance in higher education, and overall household savings are satisfactory.

This will help Ireland reduce its dependence on foreign capital and gain benefits for domestic workers. Its economic prospects look good.

a Human capital It’s another way to conserve and store wealth – and the country that performs well in the human capital department is the United States, albeit with a wide variance in results.

Americans are hard working and relatively well educated among the rich. The United States also adopts a Creativity culture And her Proven track record of attracting and absorbing immigrants.

All these features help the US overcome the low household saving rate. Many Americans store their wealth in the form of human capital, which makes it difficult for foreign investors to acquire surplus production in the United States.

Canada, for its part, has made the decision to increase the value of human capital by taking in more immigrants and using a points system to select the better-educated and higher-paid people. Canada’s net foreign asset position is also strong and improving. These two factors are a reason to take an optimistic view of the Canadian economy.

These are all simple truths about the Wealth of Nations, with reasoning that Adam Smith would not have been surprised at. In the midst of short-term policy wrangling over inflation and economic stimulus, these fundamentals are often overlooked. If you want to get a clearer idea of the direction the global economy is headed, start with a few simple questions about the types of resources a country has and how they are used.