BackWhat a US economic revival means for India, other emerging nations
US is focused on greater demand and production at home, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999
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The rising American economy isn’t lifting all boats—and may even sink some.
As the US looks set to accelerate, economists from Bank of America Corp. to Morgan Stanley predict it will provide less oomph abroad than it once did, partly because of changes wrought by the financial crisis and recession. The new-look America is focused on greater demand and production at home and taps more of its own energy, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999.
A healthier US even could come at the expense of emerging markets if it turns into more of a competitor than consumer by boosting manufacturing. Developing countries also risk being hurt once the Federal Reserve withdraws its monetary stimulus, driving their cost of borrowing up and their currencies down against a resurgent dollar.
“There are signs that US pulling power may not be as strong as experienced in recent years," said Gustavo Reis, a senior international economist at Bank of America in New York. “If we want to see stronger global growth, we need the US to grow but others to rebound, too."
Finance ministers and central bankers will pore over the outlook this week in Washington at the annual meeting of the International Monetary Fund. The lender will update on Tuesday its forecasts for worldwide expansion of 3.1% this year and 3.8% in 2014 after managing director Christine Lagarde said last week that growth remains subdued.
Ebbing influence
One surprising reason for that may be the ebbing influence of the US even as the median forecasts of economists surveyed by Bloomberg News point to expansions of 2.7% in 2014 and 3% in 2015, up from 1.6% this year.
The government shutdown may be a near-term hurdle. Another poll suggests it will shave 0.1 percentage point from growth after one week. Failure to raise the US debt ceiling would be even more of a threat given Goldman Sachs Group Inc. economists estimate that could require the government to squeeze fiscal policy by an annualized 4.2% of gross domestic product, risking an economic slump if not reversed fast.
A 1 percentage point pickup in US GDP growth typically meant a 0.4 point spillover for the rest of the world, according to Reis. The pulse now may be moving toward 0.3 point, which if reached, would amount to a 25% drop in America’s overseas clout.
Buy dollars
If US economic performance does get better in such an environment, then investors should buy the dollar as the faster recovery spurs borrowing costs, according to foreign-exchange strategists at Morgan Stanley and Citigroup Inc. They should sell emerging-market currencies as capital flows return to the US, imposing higher interest rates and subsequently weaker activity on the former locomotives of global growth.
A potential taste of things to come was evident in the summer, when even the suggestion that the Fed would begin slowing its $85 billion in monthly asset purchases was enough to undermine emerging-market bonds and currencies. Those markets rebounded after the Fed decided 18 September to continue its quantitative-easing programme.
The one-two punch of softer external support and funding pressures would pose the biggest challenge to Brazil, Turkey, South Africa, India and Indonesia, strategists at Goldman Sachs said in a 5 September report. The Czech Republic, South Korea and Mexico are better positioned to enjoy what US support there is and have less reason to worry about financing, they said.
Last resort
More US demand would mark a change from recent history when trade partners harnessed a strengthening American economy and currency to power exports. In the run-up to the 2008 financial turmoil, the US was credited with serving as the world’s consumer of last resort.
That was evident in how American imports of non-petroleum goods and services rose to about 12% of GDP in 2000 from about 7% in 1994 and added a couple more percentage points more from 2003 to 2007, according to Steven Englander, Citigroup’s head of Group of 10 currency strategy in New York. In recent years, imports have flattened at about 14% of GDP, meaning the foreign impact of extra US growth will be negligible, he said.
The US current-account deficit already suggests US foreign consumption is waning, having narrowed to about 2.5% of GDP from almost 6% in 2006. The last time it was so low was 14 years ago.
‘Much Less’
“There is plenty of reason to think the contribution of US growth to the rest of the world will be much less than in previous rebounds," said Englander, a former Federal Reserve Bank of New York researcher.
“A faster-growing US still would be favoured internationally over a renewed slowdown," said John Calverley, head of macroeconomic research at Standard Chartered Plc in Toronto. A bigger economy would mean Americans buying more goods from abroad, and recovery-led gains in US equities would improve financial conditions globally.
Emerging markets would prefer a rising US market than one that was weak, he said.
A study of spillovers published by the IMF last week found that although economies aren’t correlated as much as they were during the crisis, the US still matters most from a global perspective. A 1% positive surprise in its growth rate increases output elsewhere by 0.2% after two years, twice the effect of similar accelerations in China and Japan, it said.
Smaller contribution
One explanation why the US engine may be slowing overseas is that its share of worldwide GDP shrank to 22% this year from 31% in 2000, according to IMF data. In the meantime other sources of demand have emerged, including China, which now accounts for 12% of global output, up from 4% in the same period.
Bank of America’s Reis argues that the quality of US growth is changing from the consumption-led boom of a decade ago that aided manufacturers abroad, especially in Asia. While consumption will edge up 2.5% next year compared with 2% in 2013, Reis says the driver this time will be an 18% jump in spending on homes—good for Canadian lumber producers but not for many other foreign businesses.
The US also is now less in need of foreign energy thanks to increased domestic output amid the development of fracking, which draws on reserves in shale-rock formations. America churned out an average 7.2 million barrels a day of crude since the start of January, the highest since about 1991, and Credit Suisse Group AG estimates the inflation-adjusted petroleum trade deficit has fallen 54 percent since 2006.
Trade position
Such trends will boost the US trade position by more than $164 billion in 2020—a third of the present shortfall—as the need for energy imports declines and U.S.-based fuel- intensive industries become more competitive, according to a September study by Lexington, Massachusetts-based IHS Inc. EOG Resources Inc. and Pioneer Natural Resources Co. are among the Texas-based oil explorers whose stocks have soared this year.
The fresh energy supplies also may combine with competitive labour costs and cash-rich corporate coffers to propel a recovery in manufacturing within the US, leaving the country less reliant on goods from abroad. A Citigroup report in May predicted a reversal of the 50-year decline in manufacturing’s share of GDP, including the creation of 2 million jobs.
Another theme is that US companies are increasingly repatriating production from China and other emerging markets, which lured it with cheaper labour costs.
Moving manufacturing
Fifty-four percent of US manufacturers with sales topping $1 billion are planning to or considering bringing back factory- lines from China, up from 37% in February, the Boston Consulting Group said 24 September, citing a survey of 200 executives. It projects that with Chinese wages and benefits rising 15% to 20% a year, the cost of operating in China will be the same as staying in the US by 2015.
Trellis Earth Products Inc., a Portland, Oregon-based producer of bioplastics, said in July it is moving its manufacturing operations to New York state from China, investing $8.3 million and creating almost 200 positions.
What you see is more companies reshoring and bringing jobs back, said Harold Sirkin, a Chicago-based senior partner at BCG. Previous headwinds are turning into tailwinds.
A further challenge for emerging markets is that reindustrialization means Americans are again finding it profitable to produce less-sophisticated products such as fabricated metals and chemicals, said Manoj Pradhan, global emerging-markets economist at Morgan Stanley. Those are the very goods that countries like China would have wanted to start supplying to maintain their development.
The growth divide could be reinforced once US companies ramp up capital spending, which Morgan Stanley predicts will grow 6% in each of the next two years, compared with 2.25% this year. Such outlays are likely to benefit Germany and Japan and perhaps specific sectors such as information technology in India, rather than developing nations as a whole, he said.
The silver lining is that greater competition internationally should force governments to take steps to raise productivity, Pradhan said. The rebalancing of demand around the world also could be welcomed by the IMF, which has suggested an over-reliance on the US for growth helped spark the financial crisis.
In the long run, this is a win-win, said London-based Pradhan. That’s still a long way away, but good news nevertheless. Bloomberg
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