Simon Kennedy, Bloomberg
Paris: Demand from overseas is throwing a lifeline to an America weighed down by the housing slump and weak business investment. With exports accelerating and imports shrinking, trade this year may add to growth instead of subtracting from it for the first time in more than a decade.
“Had it not been for the rest of the world, the U.S. economy might be seriously floundering,” says Stephen King, chief economist at HSBC Holdings Plc in London.
That’s a change from the last 40 years, when the U.S. powered the world economy through financial crises elsewhere but gained little thrust from abroad when demand turned weak at home. Back then, when the U.S. sneezed, the rest of the world caught a cold; “nowadays, when the U.S. sneezes, the rest of the world goes shopping,” King says.
The shift gives central bankers and finance ministers of the Group of Seven, the world’s biggest industrialized economies, reason for optimism as they meet in Washington this week. “There are in Europe elements of broader and deeper sustained growth which exists independently of the other side of the Atlantic,” European Central Bank President Jean-Claude Trichet said at a press conference 28 March.
The Big Differences
The big differences now: The housing slump that’s dragging down demand in the U.S. is having little impact beyond the country’s borders, while other economies are generating enough demand on their own to prop up growth elsewhere.
“The U.S. slowdown has had little discernable effect on growth in most other countries,” the International Monetary Fund said in a report last week.
That could change if the housing recession does more damage than most economists now expect to the rest of the U.S. economy. The U.S. still accounts for a fifth of the global economy and is its biggest importer.
“Global demand won’t be immune to a genuine U.S. demand shock,” says Dario Perkins, an economist at ABN Amro Holding NV in London.
Even though the importance of the U.S. market has diminished, there’s still danger of “spillover” from a slowdown in the world’s largest economy because so many companies and investors in the rest of the world have ties to American businesses and markets, the IMF report says.
Stephen Roach, chief global economist at Morgan Stanley in New York, also doubts that consumers elsewhere wield big enough spending power to compensate for softness in the U.S.
‘A Good Deal Weaker’
“The global economy is likely to be a good deal weaker than the decoupling crowd would lead you to believe,” says Roach.
So far, though, there’s little sign of weakness in major economies outside the U.S. The 13 nations that share the euro are being buoyed by record low unemployment and the highest confidence in six years. Japan’s economy, after wobbling at the end of last year, is also extending its longest expansion since World War II, with business confidence near a two-year high and household spending on the rise.
Emerging markets such as China and Brazil are also coming to the fore with consumer and capital spending last year growing at twice the rate of developed nations. Persian Gulf states including Saudi Arabia and the United Arab Emirates are investing billions of dollars gleaned from higher oil prices.
That’s helping some U.S. companies build export sales to make up for weaker demand at home. Machinery revenue at Peoria, Illinois-based Caterpillar Inc., the world’s largest producer of earthmoving equipment, jumped 13% in the fourth quarter as demand from Asia, Europe, Latin America and the Middle East offset a drop in North America. In the same period, Cincinnati- based Procter & Gamble Co., the biggest U.S. consumer-products maker, reported increased sales to emerging markets and raised its 2007 profit target.
“With attention focused on risks to the U.S., it is easy to lose sight of the positive news coming from the rest of the world,” says David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York.
The world may become even more reliant on growth outside the U.S. in the years to come, as productivity gains accelerate more in Europe and Japan than in the U.S., says Larry Hatheway, chief economist for UBS AG in London.
The result, he says: Economic growth in the U.S. will weaken to about 2.8% annually over the next decade from 3.3%. Meanwhile, growth in Europe will pick up to 2.2% from 2%, and in Japan to 1.8% from 1.2%.
Shift in Growth
“A relative shift in trend growth rates ought to be positive for the world economy,” says Hatheway.
Brazil, Russia, India and China will increasingly contribute to global growth by providing alternatives to the U.S. market, says Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London.
European exports to China and Russia last year grew four times as much as those to the U.S., and “the emerging market economies are where all the future juice is for the world economy,” says O’Neill.
Stronger growth outside the U.S. and a slowdown domestically may also help to narrow the U.S. current account deficit, which was identified by the G-7 and IMF as a potential threat to global expansion. The current account deficit, the broadest measure of U.S. trade including transfer payments and investment income, widened last year to a record $856.7 billion, or 6.5% of gross domestic product.
This year “could prove to be a turning point for global imbalances,” says Alex Patelis, head of currency strategy at Merrill Lynch & Co. in London. If the world economy can grow independently of the U.S., it would mark the first time it has done so since the late 1960s, when Japan and Europe were still benefiting from their postwar economic rebound.
Since then, five U.S. recessions each tugged down growth in industrial countries by an average of 2 percentage points, the IMF calculates.
A break in that pattern this year would be well-timed, with former Federal Reserve Chairman Alan Greenspan talking about a “one-third probability” of recession in the U.S.
“Tradition demands that a weak U.S. economy gives rise to a weak global economy,” says HSBC’s King. “Tradition, though, is wrong.”
—With reporting by Kevin Carmichael, William McQuillen and Craig Torres in Washington, Sean Evers in Dubai, Lily Nonomiya in Tokyo, Carol Wolf in Cleveland