The unbalanced global economy: American Shopper

THE ECONOMIST

The world is once again relying too much on American consumers to power growth

A GLOBAL economy running on a single engine is better than one that needs jump leads. The American economy is motoring again, to the relief of exporters from Hamburg to Hangzhou. Firms added more than 1m net new jobs in the past three months, the best showing since 1997. Buoyed up by cheap petrol, Americans are spending; in January consumer sentiment jumped to its highest in more than a decade. The IMF reckons that American growth will hit 3.6% in 2015, faster than the world economy as a whole. All this is good. But growing dependence on the American economy--and on consumers in particular--has unwelcome echoes.

A decade ago American consumers borrowed heavily and recklessly. They filled their ever-larger houses with goods from China; they fuelled gas-guzzling cars with imported oil. Big exporters recycled their earnings back to America, pushing down interest rates which in turn helped to feed further borrowing. Europe was not that different. There, frugal Germans financed debt binges around the euro area's periphery.

After the financial crisis, the hope was of an end to these imbalances. Debt-addicted Americans and Spaniards would chip away at their obligations; thrifty German and Chinese consumers would start to enjoy life for once. At first, this seemed to be happening. America's trade deficit, which was about 6% of GDP in 2006, had more than halved by 2009.

But now the world is slipping back into some nasty habits. Hair grows faster than the euro zone, and what growth there is depends heavily on exports. The countries of the single currency are running a current-account surplus of about 2.6% of GDP, thanks largely to exports to America. At 7.4% of GDP, Germany's trade surplus is as large as it has ever been.

China's growth, meanwhile, is slowing--and once again relying heavily on spending elsewhere. It notched up its own record trade surplus in January. China's exports have actually begun to drop, but imports are down by more. And over the past year the renminbi, which rose by more than 10% against the dollar in 2010-13, has begun slipping again, to the annoyance of American politicians.

America's economy is warping as a result. Consumption's contribution to growth in the fourth quarter of 2014 was the largest since 2006. The trade deficit is widening. Strip out oil, and America's trade deficit grew to more than 3% of GDP in 2014, and is approaching its pre-recession peak of about 4%.

The world's reliance on America is likely to deepen. Germans are more interested in shipping savings abroad than investing at home. Households and firms in Europe's periphery are overburdened with debt, workers' wages squeezed and banks in no mood to lend. Like Germany, Europe as a whole is relying on exports. China is rebalancing, but not fast enough: services have yet to account for more than half of annual Chinese output.

Diverging monetary policies will exacerbate the problem. The prospect of quantitative easing by the European Central Bank has sent the euro tumbling against the greenback, further helping European exporters. Central banks in Tokyo, Beijing and Mumbai are all easing. The Federal Reserve appears ready to begin raising interest rates this summer. That is sending yield-hungry capital to America, and the dollar skyward.

Shop until you droop

Two dangers loom. The short-term worry is that weak exports, a rising dollar and a slowdown in energy investment (because of falling oil prices) will stifle the American expansion. Rather than pull others along, America will be dragged down by their weakness. That is why the Fed should be none too eager to raise interest rates. With inflation below target it has no need to rush to tighten.

The longer-term fear is that growing imbalances will repeat the financial cycle of the 2000s, in which exporters to America once again finance reckless consumer borrowing. The ratio of Americans' debt to income has fallen from a pre-crisis high of more than 120% to around 100%, but consumers still have too much incentive to load up on debt. Politicians would do well to get rid of subsidies like tax relief on mortgage interest.

But the burden to act does not lie just on America. Leaders from Brussels to Beijing should not allow falling currencies to become a substitute for structural reform, or for efforts to boost spending at home. A strong American economy is a boon to the world. It should not be taken for granted.

This article was from The Economist.

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