Economic Recovery: The World Looks to Us, the U.S.

In the past few weeks, I've visited several CEOs in Europe and Asia. During my trip, I was asked the same two two questions over and over: "When will U.S. consumers start spending again?" and "When they do, will they be buying from overseas?"

These questions underscore how heavily the U.S. economy influences that of other countries. As other countries look for the U.S. to rebound and spark a worldwide recovery, companies everywhere have to prepare for the very real possibility that recovery could be long-delayed and may not take the form that many hope. Indeed, the nightmare scenario for most Asian and European executives is that when the U.S. does recover, recession-weary U.S. consumers will continue to cautiously hold on to their money, increasing their savings rather than spending.

This trend began last year, when the U.S. personal savings rate, which was 0.6% in 2007, tripled to 1.8%. The savings rate continues to rapidly accelerate, according to the U.S. Commerce Dept.'s Bureau of Economic Analysis, averaging 5.1% from January to May this year. If the U.S. dollar weakens at the same time, making "Made in the USA" products more competitive (both domestically and globally), many Asian and European companies won't benefit as much as they need to from America's rebound.

Concern in Europe and Asia

European executives are especially concerned. Many European economies heavily depend on exports to the U.S. But America isn't buying, which has helped push Europe's economies into reverse. During the first four months of this year, exports to the U.S. from the 27 EU countries were down 26% overall from the same period a year earlier, falling from approximately $121.7 billion in January-April 2008 to $90.2 billion in January-April 2009. Especially hard hit were Estonia, down 61%; Portugal, down 41%; and Germany, down 33%. France and the U.K. fared only slightly better, declining "just" 23%.

Their overriding concern, therefore, is not so much what's happening in Europe, per se, but what's happening in the U.S. The Europeans realize that increased exports to Asia on the massive scale needed to make up for lost U.S. sales are not in the cards. They are convinced that their own economies won't recover—in fact, can't recover—until ours moves into positive territory, and U.S. businesses and consumers start buying again. Even then, they think a European recovery will be a long time coming.

Asia, of course, also is hurting and many Asian executives are similarly pessimistic, particularly the Japanese and Koreans. During the same January-April 2009 period that saw European exports to the U.S. fall by 26% from a year earlier, exports from the Asia-Pacific region to the U.S. declined 23%, according to the U.S. International Trade Commission. Japan took the biggest hit, with exports to the U.S. tumbling 43% on a year-to-year basis. Korean exports were down 21%; China's were off a "mere" 12%.

The Koreans are concerned not only because their U.S.-bound exports fell significantly, but because they risk being caught in what they call a "nutcracker," with more experienced and better-known Japanese companies using the recession to muscle them aside at the high end of the global market and the relentlessly low-cost Chinese trying to swamp them at the low end of the market.

Hopes for a U.S. Spending Rebound

The Koreans are looking to innovation to get them out of the potential trap. While other companies around the world were cutting back, the 393 publicly listed companies belonging to the Korea Listed Companies Assn. increased R&D spending by 14% during the first six months of 2008 over the same period in 2007.

According to a survey earlier this year by the Korea Institute of Industrial Technology Evaluation & Planning, a surprisingly large number of Korean companies (40% of the 800 surveyed) planned to increase R&D spending this year as well.

Korean executives see the U.S. as the ideal market for the new innovation-driven Korean economy. But they realize, they told me, that there's no market without a U.S. recovery. And a U.S. recovery still could be many months away (and could be a weak one at that, many experts fear).

The Chinese and Japanese are no less eager for a rebound. The Chinese hope that increased U.S. business and consumer spending will enable China to return to double-digit economic growth. The Japanese hope that a growing-again U.S. economy will not only trigger a renewed surge in Japanese imports, but will rekindle Chinese demand for high-end Japanese components, the kind China uses in goods headed for the U.S. market.

Without the U.S. spending at a healthy rate, the Japanese see their economy continuing to spiral down, especially with their population aging and population growth far below replacement levels—causing a natural decline in the economy. (According to a joke now making the rounds in Japan, if the country's population continues to decline at its current rate, by the year 2700 there will be only one Japanese citizen left in the country, and it will be his—or her—duty to "turn out the lights.")

Japan's economic decline is so significant that even foreign workers have been leaving as the traditionally low unemployment rate climbed to a five-year high of 5.2% in May—close to the post-World War II record of 5.5%, recorded in April 2003. The Organization for Economic Cooperation & Development in June predicted further increases in coming months, with unemployment in Japan expected to reach 5.8% or higher next year.

A Recovery at What Expense?

So we wait for the big questions to be answered: When will the American economy start growing again, and will U.S. consumers continue to save or will they once again spend themselves into hock after a long period of delayed gratification and pent-up demand?

Given that nobody can predict with any certainty what the future will bring, and one can only make educated guesses as to the timing and nature of the recovery, U.S. companies need to hedge their bets.

In this age of globality, the world's economies are more coupled than ever—and all of them are in one way or another hitched to a U.S. engine. But which way will the engine pull?

If the U.S. returns to spending way beyond its means, it will allow the world to recover far faster, but it will be mortgaging its future, perhaps beyond the point of no return.

If the U.S. changes its ways and becomes more savings-oriented, reducing consumer spending and government and consumer debt, the rest of the world may have to wait longer for a full recovery.

The world awaits our answer.

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