Here’s a big change that is about to rock the world: The US manufacturing sector is poised for a major revival and could, in a few, short years, topple China.
That’s according to a Boston Consulting Group (BCG) report quoted by Ruchir Sharma, managing director and global head of emerging markets equity team at Morgan Stanley, in a weekly column in The Economic Times.
China became the world’s factory because of its low-cost labour, cheap currency and government incentives to attract foreign investment. However, a sharp appreciation in the Chinese yuan, higher inflation and wages are now set to make manufacturing in the US just as economical as in China for many goods made for North American consumers by 2015, according to BCG.
That greatly improves the fundamentals of the US dollar, which has experienced a decade of underperformance, noted Sharma, adding that the greenback could now be on the comeback trail – to the detriment of emerging market currencies.
Reuters
Sharma said that a slump in the dollar over the past decade had led to an increase in the share of US exports in global trade,which had narrowed the US’s current account deficit (the gap between exports and imports).
Improved foreign direct inflows, as well as increasing self sufficiency in energy are also easing pressure on the current account deficit, which is good news for the dollar, he added.
Of course, the dollar’s ascent will have implications for the value of emerging market currencies.
So far, the currencies worst affected by the dollar’s ascent have been those whose countries have a large current account deficit and higher inflation rates than the US, such as the South African rand, the Turkish lira and Indian rupee, said Sharma. Don’t expect that trend to reverse even if the eurozone crisis gets resolved, Sharma added.
“The popular explanation is that the currency weakness is a function of heightened risk aversion arising from troubles in euroland. That can explain some of the volatility, but the bigger story may well be that the dollar is on a comeback trail as many of factors that led to its decline and the rise of emerging market exchange rates have exhausted themselves,” he said.
For the entire Economic Times column, click here.