The peak of the stock market ten years ago ushered in one of the worst decades on record for the G4 economies and their stock markets. Most strikingly, the US economy fared particularly badly. In absolute terms, the past decade constitutes the worst since the 1930s. Employment failed to grow for the first time during the twentieth century. This is in stark contrast to the 7 million jobs generated by its European counterparts, and the 20 million jobs the US itself produced in each of the two preceding decades. Only Japan fared worse among the G4.

 

 

However, this ‘lost decade’ does not, as some have suggested, necessarily signal the end of American economic hegemony. We argue that this lacklustre performance on jobs is as much about demography as it is about geography. The US employment rate has fallen back to levels last seen in the early 1980s, despite reasonable economic growth. Globalisation and the emergence of China in particular can account for some of that structural change; but a drop in US labour force participation, reflecting the steady ageing of the US population, has also played a significant part. Globalisation implies labour everywhere is ‘cheap’, while US demographics imply participation is falling. But the forecast predicts strong growth in non-farm payrolls, with the monthly change hitting around 200,000 by the end of 2010. The participation rate is likely to fall quite steeply over the next decade, thanks to demographics, and unemployment could fall to as low as 2% as a result.

 

 

The shift of economic power from East to West is likely to take some time to complete and, in the meantime, the relative performance gap between the US and China will narrow, as a consequence of stronger US growth, and some rebalancing as Asia focuses on developing internal demand. The US labour market has responded aggressively to the financial crisis, the result has been strong productivity growth plunging real unit labour costs. Combined with the sustained weakening of the dollar over recent years, this environment should provide US producers with a competitive platform for the coming recovery. By contrast, the forecast remains relatively downbeat on Europe, including the UK. Although both regions benefit from a US-led global recovery, they are judged to be at significant risk of a sovereign default or downgrade-related event that could induce a double-dip recession and perhaps even deflation.

 

 

For the first time since the start of 2008, it is overweight equities and underweight bonds. By country, we favour US assets over those of Europe of Japan. The allocation is most underweight UK assets.