times more than the Chinese. But the American binge is coming to an end.
As the U.S. housing bubble bursts, the American consumer is likely to stumble. Without the “wealth effect” imparted by rising home prices, households will be exposed more directly to the longstand-ing pressures of stagnant real wages, record debt loads and negative saving rates. Cutbacks in discretionary spending are likely–hitting big-ticket items such as cars, furniture, appliances, travel and entertainment.
This weakening of U.S. consumption is likely to have important global consequences. That’s because growth in the rest of the world is overly dependent on exports–especially those to America. For example, from 2003 to 2005, export growth averaged 7 percent a year in Europe, Japan and the newly industrialized economies of Asia, such as South Korea, Taiwan, Singapore and Hong Kong. That was nearly six times the anemic 1.2 percent average growth rate of private consumption in these same economies.
In China, exports have now risen to more than 35 percent of GDP, with about 40 percent of them going to the United States (when Taiwan and Hong Kong are included). And China’s supply chain is fed by component manufacturers elsewhere in Asia, including Japan, as well as bymaterials producers in Brazil, Australia, Canada and even Africa. Consequently, any sneeze by the American consumer could quickly give the rest of the world–developed and developing countries alike–a nasty cold.
Ill prepared for this possibility, the global economy needs a new consumer. That won’t be easy to find. Employment growth and real-wage trends–the forces that sustain consumer purchasing power–remain weak in most industrial economies. Globalization is pushing job creation offshore and squeezing pay rates. Productivity and competitive pressures are compounding the problem.
In Europe, persistently rigid labor markets and the high fixed costs of hiring and firing underscore a lingering sense of structural malaise that inhibits spending in the world’s second richest consumer market. At the other end of the spectrum, Chinese consumers are fearful of job and income security. With more than 60 million Chinese workers having been displaced by the dismantling of state-owned enterprises since 1997, those fears are understandable. Largely as a consequence, Chinese families are inclined toward precautionary saving. That mind-set could inhibit for years the development of a consumer culture, despite Beijing’s new efforts to create one.
With the American consumer likely to slow and consumers elsewhere in the world unlikely to fill the void, growth in the world economy could well be at risk. This could come as quite a surprise to global investors, most of whom are banking on a continuation of the four-year boom in world economic growth. Financial markets have begun to discount such a possibility, but further adjustments could well lie ahead.
If global growth slows–say, to 3.5 to 4 percent in 2007, down from an average annual rate of 4.8 percent over the past four years–corporate earnings and equity markets would undoubtedly come under pressure. A slowdown in global growth would also bring the current inflation scare to an end–possibly pushing prices of oil and other industrial commodities significantly lower. That would set the stage for a further improvement in global bond markets and a related reduction in long-term interest rates.
Painful as it might appear, slower U.S. consumption could temper one of the biggest risks in financial markets. Given the record import content of the U.S. economy–some 17 percent of GDP in early 2006–any meaningful reduction of America’s domestic spending would lead to significant cutbacks in purchases of foreign-made goods. That would tend to reduce record U.S. trade and current-account deficits–thereby lowering the odds of the dreaded dollar crisis.
But in the end, there must be more to rebalancing the global economy than a drop in U.S. consumption. An export-dependent world economy has leaned too hard for too long on the American consumer as the sustenance of economic growth. As the housing bubble bursts, overextended U.S. consumers can’t afford to carry that load any longer. Other countries must now learn to grow the old-fashioned way–drawing greater support from their home markets rather than free-riding on the United States.
