Fault Lines Fracture Rebalanced World Economy: Cutting Research

The rebalancing of global demand following the financial crisis may mask fault lines that still threaten the world economy, according to HSBC Holdings Plc and Deutsche Bank AG.

The international economy’s overreliance on U.S. consumer demand and Chinese exports were among imbalances policy makers later said helped fuel the turmoil of 2008. By leading to a misalignment of currencies and leverage, they threw the world out of kilter, paving the way for its deepest recession since World War II.

While there are some signs the global economy is now on a more even keel, there may be reasons to worry about how that shift occurred and how sustainable it is, according to separate studies published recently by Stephen King at HSBC and Deutsche Bank’s Thomas Mayer and Markus Jaeger.

Chief Economist King found that the countries experiencing the biggest improvements in their current accounts did so not because of the targeted export growth, but because of fewer imports. In Spain, for example, the current account -- the broadest measure of trade because it includes investment -- improved 8.9 percentage points as a share of GDP between 2007 and 2012. While exports rose an annual average 2 percent over that period, they were outpaced by a 3 percent decline in imports.

Elsewhere, deteriorating current accounts were driven as much or more by slowdowns in exports as by increases in imports -- a more desirable cause. So China’s export growth weakened from an annual average of 30 percent between 2002 and 2007 to 12 percent in the subsequent five years, which almost offsets the 15 percent annual gain in imports.

This amounts to what King calls a “recessionary rebalancing,” which, as he told an Oct. 16 HSBC investment conference in London, poses threats to the economic outlook. That’s because the drivers have been dwindling demand for emerging market exports, easy monetary policy in the West and a failure by some economies to improve their competitiveness.

Equally bleak are Mayer and Jaeger of Deutsche. They outlined in an Oct. 9 report how current account disparities endure, albeit at lower levels. While the aggregate surplus of emerging markets is down from $676 billion in 2008, it remains at $300 billion this year. The deficit of advanced countries fell to $50 billion from $479 billion.

The problem is such aggregate shifts cover up weaknesses within trade, according to Mayer and Jaeger. The deficit in the U.S. has increased by about one-quarter since falling to less than $400 billion in 2009. The euro area’s surplus has climbed to a record $300 billion. Although China’s surplus has declined, the likes of India, Brazil and Turkey have seen their shortfalls remain relatively large, Deutsche said.

“The persistence of current account imbalances suggests that the present recovery is more fragile than generally perceived,” said Mayer and Jaeger. “A disruption of international capital flows needed for the funding of current account imbalances could induce a relapse into financial crisis.”

If the U.S. remains reliant on consumer demand and emerging markets find continued support from capital flows, then central banks such as the Federal Reserve will be reluctant to reduce monetary stimulus quickly for fear of roiling financial markets and trampling the economic recovery, they said.

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Emerging markets have become more important trading partners for the U.S. than are developed nations.

Since the global financial crisis began brewing in 2007, there has been a “consistent” shift of U.S. trade from rich countries to poor ones, according to a study by the Federal Reserve Bank of St. Louis.

Over that period, two of the poorest major U.S. trade partners, Mexico and China, increased their importance as import sources and even more as destinations of exports, economist Alexander Monge-Naranjo wrote in a study published last month. By contrast, Canada, Japan, Germany, the U.K. and France lost some of their importance as providers and purchasers of goods.

A principal explanation stems from how economies fared during the great recession. Per-capita income grew more in China and Mexico than it did in the U.S., suggesting the economic slump was “mostly a rich country phenomenon,” said Monge-Naranjo.

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Income inequality in developed economies has been aggravated by what people can afford to put in their shopping basket, according to a UBS AG report.

“The goods purchased by lower income groups have tended to experience faster price increases than the goods purchased by higher income groups,” Paul Donovan, managing director for Global Economics, said in an Oct. 9 report to clients.

That’s because low-income households spend more on food and energy than do those with higher pay. In the U.S., for example, the top 20 percent of income distribution spends less than 8 percent of their household budget on food, while the bottom 20 percent spends over 12 percent.

This matters because, while the recent financial crisis and recession reduced demand and prices for consumer products, it didn’t have as big an impact on commodity prices, said Donovan.

The result since 2008 has been a 0.5 percent difference in inflation rates for those in the bottom 20 percent of income distribution, versus price increases faced by the top 20 percent of earners across 13 countries.

“This has meant that almost universally across developed economies the economic downturn meant that it was more expensive to be poor than to be higher-income, and as a result inflation inequality persisted,” said Donovan.

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Americans over the age of 50 will have a $13.5 trillion impact on the economy in two decades’ time, almost twice their effect of today.

In a report on what they call the “Longevity Economy,” sponsored by sponsored by the Washington-based older-American advocacy group AARP, Oxford Economics analysts calculated that over-50s currently spend $4.6 trillion a year. This in turn feeds through the economy, creating $7.1 trillion of economic support in total. That’s equivalent to 46 percent of gross domestic product and bigger than the economy of any nation with the exception of the U.S. and China.

Part of the reason it will climb past half of GDP is that the labor force participation rate of over-50s will rise from 41.6 percent today to 43 percent by 2020. If the participation rate increases another 2.5 percentage points, that would add $103 billion to potential output by 2020.

Spending on health, education and recreation are the spending categories set to grow the fastest, the Oct. 10 report said.

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People experience the pain of losing money more intensely than the joy of earning more.

A University of Stirling study published by Psychological Science this week found that we aren’t happier than our grandparents despite gains in living standards over the past 50 years.

The reason, according to the research led by Christopher Boyce of the Scottish university, is that the psychological benefits from income increases are wiped out by income losses even if the pay cuts are smaller.

The study was based on data gathered from 20,000 people in the U.K. and 30,000 in Germany over the past nine years. “Both individuals and societal well-being may be best served by small and stable income increases even if such stability impairs long-term income growth,” said Boyce.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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