Anirbal Basu of Sage Policy Group, ULI Washington’s perennial favorite in making economics interesting, kicked off this year’s highly successful Trends conference with an overview of the global, national, and regional economy. His verdict: rosy in the near term, challenging further out.
Why? To begin with, the global economy is weak. The world’s economy grew at a rate of just 3.1 percent last year – the slowest since the beginning of post-recession recovery, and below the projected rate of 3.5 percent. Advanced economies showed particularly slow growth, with Europe at 1.7 percent, Japan at 1.2 percent, Canada at 1.9 and the US at 2.3.
An even bigger disappointment, Basu went on, has been slower than expected economic growth in many developing countries, including Brazil at just above zero percent this year, and Russia in recession. China’s projected 2017 growth rate of 6.6 percent may sound good, but it’s the worst in three decades.
Driving this trend is world demography. Population growth is exploding in countries with the least output per capita, Basu explained. Nigeria’s 2015 population of 182 million could soar to nearly 400 million by 2050, surpassing the population of the entire US. Meanwhile, China, Germany, Russia and Japan are expected to lose population over the same time period. In the US, the average replacement rate of 1.87 children per woman is high by global standards for advanced countries.
To add to the people problem, global debt today stands at $152 trillion, twice that of the year 2000, representing 225 percent of global GDP, with two thirds owned by the private sector. The need to spend so much on debt service will continue to affect global growth. At the same time, commodity prices have collapsed; oil, for example, has dropped from $147 per barrel in 2008 to about $50 today.
Despite these global headwinds, the US economy has been expanding at an average rate of 2.1 percent annually since 2009, driven in large part by consumer spending. Unemployment is low, and with only 63 percent of the adult population in the labor force, it is difficult to fill many jobs. Even business investment, which has lagged in a disappointing manner, picked up in the fourth quarter of 2016 with business confidence attributed to the election.
Drilling down to the local level, Basu noted that the Washington, DC metropolitan area economy grew by only 1.6 percent between March 2016 and March 2917, placing it 18th on the list of the strongest metros; Atlanta leads the nation with a 3.9 percent annual growth rate. Architecture billings had a bump in December 2016, “as if a real estate developer had been elected president,” said the speaker jokingly.
While public spending on infrastructure is in the negative territory, the regional pace of office, hotel, and commercial construction is up 12 to 21 percent over the same time period. “My feeling about this is that the tail is wagging the dog; where else are offshore investors going to put their money?” commented Basu. “Developers may think that high commercial property values are due to scarcity, but the supply is likely to exceed demand and we will be overbuilt.” The one sector in which demand will likely outstrip supply, he went on, is housing, as millennials age into their 30’s and seek out larger homes for expanding families.
Global money will continue to pour into the US, and particularly into the Washington, DC region, as investors seek yield and safety, Basu predicted. This trend could create “bubbles” of oversupply in office, lodging, and multifamily real estate. Inflation and interest rates are on the rise. “Tax cuts – or at least the belief that they are on the way – should help see us through the short term,” Basu concluded. But long-term structural issues, including the national debt and entitlement funding, he warned, are likely to combine with rising interest rates to create serious challenges ahead even as the short-term situation improves.
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Anirban Basu , Sage Policy Group, Inc.
Anirban Basu, Chairman & Chief Executive Officer, Sage Policy Group, Inc.
Recap Written by Leslie Braunstein