Can the World Economies Gain Back on the U.S. Economy?

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May 12, 2015

As markets throughout the world continue to grow and become further advanced, questions are beginning to be raised as to whether the U.S. dollar will remain the dominant force it has been in the past. In particular, the rise of the Chinese economy has triggered these doubts. However, the global financial landscape is far more complex than a two horse race between the two. The dominant reserve currency in the world, the U.S. dollar, appears to have some opposition at last. A closer look at all the players will better reveal the economic landscape and identify which countries can outperform the U.S. in the long term.

When analyzing the economic performance of a country, the crucial indicator is usually the gross domestic product growth. However, the state of the currency is also important. Fiscal and monetary policy also plays important roles in shaping countries economic fortune.

The U.S. economy is, arguably, both the most diversified and the most technologically advanced economy in the world. Despite this fact, in the last 3 years annual GDP growth has not exceeded 3.1%. The figures show that the average annual growth over the last 3 years has been 2.34%. It makes sense then, that in this period the dollar was relatively stable. That is until mid-2014 when it rose rapidly on the back of consistent GDP growth and favorable conditions in the world market.

China’s progress has been very different to that just described. Complexity has been added by the fact that it is working towards a freer and more democratic market. The last few years have seen a slowing in the economic growth momentum. The slow-down has been quite gradual and stable and in reality the rate of growth is still quite high; the 3-year average is 7.5% (more than double that of the U.S.). Furthermore, a China-led Asian Infrastructure Investment Bank is now in the process of being founded. This directly challenges U.S. dollar hegemony and accentuates the way the global economic landscape is shifting.

Support for the AIIB has come from some surprising places, which includes the United Kingdom, Germany, Russia, Brazil and even Australia. The European Union, the other large global economy yet to be mentioned, has no problem with the establishment of the Yuan as a reserve currency on par with the U.S. dollar. Strict policies carried out by the Union have seen them through some difficult times, with annual growth consistently “in the black” throughout 2014. Despite the concerns over Greece, the mood is upbeat regarding economic prospects, though they are far from out of the woods.

The question of whether the world can gain back on the U.S. economy has therefore answered itself. Some economies have been easily outperforming the U.S. for quite some time. It can’t be mentioned in depth, but such countries include India and other more emerging markets. The U.S. economy has been gaining strength in recent years and will remain the dominant force in world finance in the future. However, the level of that dominance has been reduced somewhat.