China is trying to slow its breakneck pace of economic growth. The US could use a little of what China has too much of. Are the two countries working at cross purposes?
The notion of a global growth cycle, with countries taking their cues from the US, is being challenged as Asia’s developing economies continue to boom amid a slowdown in the US.
In this new age of globalization, synchronicity is out, decoupling is in. Yes, China and India are growing in ways that may be independent of the business cycle. (China, for example, just snags a bigger market share of global exports.) Still, it’s much too early to conclude that the US slowdown will be a non-event for the rest of the world.
“The oldest rule of economic forecasting in the modern era still holds, even in the earliest years of the 21st century,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. “When America sneezes, the world catches a cold.” Weinberg reviewed 20 years of year-over-year and annual GDP data for the US and the six developed countries (Japan, Canada, Germany, France, the UK and Australia) he tracks. He found that the six economies’ growth rates moved in the same direction as the US two-thirds of the time. US real GDP growth, measured on a year-over-year basis, downshifted from 3.1% in the fourth quarter of 2006 to about 2% in the January-to-March quarter this year. (The US commerce department is expected to revise down its initial estimate of first-quarter growth from 1.3% to 0.7% next week.)
Growth in the UK, Japan and euro zone slowed in the first quarter as well, and Weinberg expects Canada and Australia to follow suit when they report next week.
The reason for believing synchronicity is still the operative model is “the US is still the largest importer of goods and services in the world,” he says. Europe’s “gross imports may be larger,” but much of that trade is with member countries.
US import growth slowed in the past year, in both real and nominal terms, with oil included and without it. China’s exports, however, are “cyclically immune,” Weinberg says.
It’s surprising that the relationship between US and foreign growth is contemporaneous, not lagged. After all, today’s orders for foreign goods are clocked as imports (in the trade data) when they arrive in the US a couple of months hence. Weinberg says intuition implies a lagged relationship, but “empirical evidence suggests there is not. The response of imports to demand is quick.”
Not everyone subscribes to the old US cold-contagion model. Some economists argue the world has become increasingly immune to American viruses. “The evidence is overwhelming that the global economy has decoupled from the US,” says Alex Patelis, head of international economics at Merrill Lynch & Co. in London. “Domestic demand growth elsewhere has accelerated, overcompensating for the negative US impulse.” A boom in capital spending, with a larger role played by emerging countries, is one reason the onus is off the US to keep the world humming.
“Global capital spending has increased faster than real consumer spending and overall GDP the past four years,” says Joe Carson, director of global economic research at AllianceBernstein.
From 2003 through 2006, capital spending growth averaged 16.5% annually in emerging countries compared with 3.5% in the developed world, Carson says. Much of the increase was in “infrastructure—airports, ports, transportation systems, energy generation and other types of commercial and service-related projects”—which has different implications for global growth than investment to add capacity for consumer goods output, he says.
Of course, no discussion about global growth would be complete without reference to the US consumer, who dwarfs his counterparts overseas. Consumer spending in the US totalled an inflation-adjusted $8 trillion (Rs32,800 crore) in 2006, well above second-place winner Japan, with $2.5 trillion, Carson says. Germany came in third with $1.1 trillion, followed by the UK at $1 trillion. Global growth seems to be “smoothing the US business cycle” and cushioning the profit cycle, with roughly 35% of first-quarter profits coming from international operations, Carson says.
So, while US imports (some other country’s exports) have slowed, strong commodity prices suggest “the world is holding up OK,” Carson says. Listening to economists argue the impact of the US on the rest of the world, I’m reminded of something that old wordsmith, Alan Greenspan, said in September 1998. With Russia defaulting on its debt and hedge fund Long-Term Capital Management (LTCM) on the verge of collapse, the (at the time) federal reserve chairman warned that “it is just not credible that the US can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.”
He was wrong. The US economy sailed right through the crisis, with some official (interest-rate cuts) and unofficial (a Fed-orchestrated bailout for LTCM) help from Greenspan.
Now the tide has reversed. Is it credible that the rest of the world can remain an oasis of prosperity in the face of distress in the US? We await Greenspan’s verdict, not to mention a new desert metaphor.