America’s Role as Consumer of Last Resort Goes Missing
Not long ago, before the financial crisis and the global recession it triggered, economists referred to Americans as the consumers of last resort. When the U.S. grew at a healthy pace, its citizens were buyers, fueling demand for the goods China (CNFREXPY) and other nations produced. They kept the world economy humming.
It may not work that way anymore, Bloomberg Markets magazine will report in its January issue. A rebounding U.S. is giving less support to global growth than in the past. Homegrown demand and production are more important drivers of the world’s biggest economy than they were a decade ago.
The smallest U.S. current-account deficit since 1999 shows the trend, and the discovery of new domestic sources of oil and gas reinforces it. Exploration and production are adding to growth, and the country is spending less on imported energy. Cheaper fuel and raw materials are boosting manufacturing as well, making the U.S. more of a competitor to emerging-markets nations and less a reliable consumer of their goods.
“Global growth is slowly becoming more of a zero-sum game,” says Manoj Pradhan, emerging-markets economist at Morgan Stanley in London and a former International Monetary Fund official. “U.S. growth is not reverting to the pre-crisis model, which created lift for everyone else.”
A 1 percentage point pickup in U.S. economic growth typically boosted expansion elsewhere by 0.4 percentage point, according to Gustavo Reis, senior international economist at Bank of America Merrill Lynch. Now, he calculates, the benefit to other countries is moving toward 0.3 percentage point, adding $48 billion to the rest of the world economy instead of $64 billion.
“A stronger U.S. economy is an important part of our expectation for healthier global growth, but the oomph to the rest of the world will probably be somewhat less than in the recent past,” Reis says.
The U.S. is likely to grow 2.6 percent in 2014 and 3 percent in 2015, according to the median forecast of economists surveyed by Bloomberg News, up from an estimated 1.7 percent in 2013. If that isn’t going to ignite growth elsewhere in the world, investors will probably favor the dollar and developed-nation stocks more than emerging-markets currencies and assets.
That’s what has happened in 2013. The South African rand has lost 18 percent against the dollar year-to-date, while the Brazilian real is down 13 percent. The Standard & Poor’s 500 (SPX) Index of large U.S. companies has returned 29 percent, compared with a loss of 1.5 percent for the MSCI Emerging Markets Index of 818 developing-world stocks.
Strengthening in the U.S. economy and weakening in China, India, Brazil and elsewhere reverses the trend that had shaped global growth since 2008. Emerging markets fared better than the U.S. and Europe during the global recession that followed the credit market freeze and the bankruptcy of Lehman Brothers Holdings Inc. Now, their luster is dimming.
As of October, the IMF was estimating the world’s developing economies would grow by 4.5 percent in 2013, the slowest pace since 2009 and well below their average for the past decade. As recently as July, the IMF was predicting 5 percent growth for the group in 2013.
A particular threat to emerging markets -- and another unhelpful result of the rebound in the U.S. -- is the pending withdrawal of Federal Reserve monetary stimulus. The first move likely will be a tapering of the $85 billion in monthly asset purchases that have helped keep interest rates low. That will start in March, according to the median forecast of economists surveyed by Bloomberg News in early November. More-stingy Fed policy may deprive emerging markets of capital and raise their borrowing costs.
“Are we worried? Of course,” Reserve Bank of India Governor Raghuram Rajan said at the IMF’s annual meeting in Washington in October. “Everyone is worried about a global storm.”
A dress rehearsal for what might happen when the Fed pulls back its support occurred in the summer, when even the suggestion that tapering would begin soon sparked a selloff of bonds and currencies from Brazil to India. “There is transition tension,” South Korean Finance Minister Hyun Oh Seok said in an interview with Bloomberg News, also during the IMF gathering. He urged the Fed to move cautiously.
At their September meeting, Fed policy makers surprised economists and investors by keeping the asset purchases at $85 billion a month. It will now probably fall to Janet Yellen, President Barack Obama’s nominee to succeed Ben S. Bernanke as chairman when his term expires on Jan. 31, to negotiate the Fed’s exit from its extraordinary monetary support.
Investing in emerging markets across the board, rather than picking specific countries, often was a winning strategy in the past decade. Now, investors may need to be more discerning. Rajan, a University of Chicago professor before taking on policy posts in India, said investors typically don’t pay enough attention to the specific circumstances of individual economies during periods of stress. “The problem emerging markets have at times like this is getting the story, the truth, about fundamentals out,” he said.
Michael Shaoul, chairman of Marketfield Asset Management LLC in New York, says some emerging-markets economies are going to see further capital outflows in coming months. Investors are separating good countries from bad, he says. “I don’t think the bear market in emerging markets has bottomed,” Shaoul says. His firm, which oversees about $17 billion, is betting against equities and bonds of Brazil and India, among others.
Private capital flows to emerging markets will decline to $1 trillion in 2014 from $1.2 trillion in 2012, according to an October estimate by the Institute of International Finance, an industry group based in Washington that represents global banks.
Trade data help explain the shift that’s curtailing the effect of the U.S. rebound on global growth. American imports of nonpetroleum goods and services rose to about 12 percent of gross domestic product in 2000, from about 7 percent in 1994, and reached a peak of about 14 percent in 2007, according to Steven Englander, Citigroup Inc.’s head of Group of 10 currency strategy in New York. Imports have been flat as a share of GDP since then, a sign that any localized pickup will have little drive internationally.
The U.S. current-account deficit, which reflects the excess of imports over exports, has narrowed. It was 2.5 percent of GDP in the second quarter compared with almost 6 percent in the third quarter of 2006. The last time it was as low as now was in 1999, when the U.S. was in the midst of a 15-year trend of ever-greater deficits.
Across the ocean and on the other side of the trade equation, Chinese exports unexpectedly fell in September after having had year-over-year gains of 10 percent to 25 percent in the first four months of 2013. With declines occurring in South Korea and Taiwan in September as well, Asia’s export-led growth engine may be sputtering. Chinese President Xi Jinping is trying to spur domestic demand over further investment in infrastructure and in factories that cater to overseas demand.
The shift in the relationship between developed and developing markets isn’t just a U.S. phenomenon. The 17 nations that share the euro have boasted a current-account surplus since early 2012. That trend reflects not just Germany’s export strength but also the declines in demand that other euro-zone members have experienced under austerity policies meant to address the sovereign-debt crisis. Japan is also trying to encourage manufacturers to produce more at home, via a cheaper yen, low interest rates and structural reforms.
The consumption that benefited foreign manufacturers a decade ago is a less important component of U.S. growth today, according to Bank of America’s Reis. While consumption will climb 2.2 percent in 2014, up from a gain of 1.8 percent in 2013, he predicts, the driver will be an 18 percent jump in property investment. Such spending stays mostly at home, with little spillover abroad.
Another reason expansion in the U.S. doesn’t foster as much global growth is simply that it’s a smaller piece of the world economy. Americans accounted for 22 percent of worldwide GDP in 2013, down from 31 percent in 2000, according to IMF data. China’s portion tripled during the same period, to 12 percent of global activity.
The U.S. has gained more control of its energy supplies, thanks to the adoption of hydraulic-fracturing and horizontal-drilling techniques that have unlocked vast new oil and gas deposits in North Dakota, Pennsylvania, Texas and elsewhere. About 7.3 million barrels of oil a day were produced in the U.S. on average during the first eight months of 2013, according to the Energy Information Administration. That’s a remarkable increase in a short time -- a 46 percent jump from 5 million barrels a day in 2008 -- and represents the biggest multiyear rise since the country’s oil production peaked in 1970.
The U.S. may improve its trade balance by more than $164 billion a year by 2020 because of the declining need for energy imports and the growing competitive edge for U.S.-based energy-intensive industries, according to research firm IHS Inc. in Lexington, Massachusetts. That’s equal to about a third of today’s current-account gap.
The good news for the U.S. economy is not all bad news for emerging markets, according to Christof Ruehl, chief economist at BP Plc (BP/), Europe’s second-biggest oil company. He sees the energy and manufacturing trends bringing significant improvement in the U.S. current account and correcting some of the world’s imbalances, which is something economists consider to be of vital importance. “This will have a huge balance of payments effect in favor of the U.S. and will go a long way in rebalancing the global economy,” Ruehl says.
Trade imbalances -- surpluses for exporters such as China and Germany and budget deficits among net importers such as the U.S. -- made the global recession worse in 2009. The countries that were driving demand, the U.S. in particular but also some European countries, were going deeper and deeper into debt, and something had to give. The world’s growth today, insofar as it doesn’t exacerbate or even heals these imbalances, may be more sustainable.
Reis’s colleague David Woo, Bank of America’s head of rates and currencies research, says improvements in fiscal and trade imbalances make the U.S. the most-improved industrial economy of 2013.
The recovery in U.S. manufacturing is being driven not only by cheaper energy but also by lower labor costs. Citigroup predicts a reversal of the 50-year decline in manufacturing’s share of GDP, helped by more-competitive worker wages. Companies are even pulling back production from China and other emerging markets. Fifty-four percent of manufacturers with sales topping $1 billion are planning to bring back factory lines from China or will consider it, up from 37 percent in February 2012, Boston Consulting Group said on Sept. 24, citing a survey of 200 U.S.- based executives.
If growth in the U.S. no longer creates a boom in other parts of the world, it remains an important ingredient in a healthy global economy. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., says if the U.S. can fire itself up, having repaired bank balance sheets and having begun to tap corporate cash piles, it would be a net positive for the world. “If you can get endogenous growth, you do not have to steal it from somewhere else,” El-Erian says.
Gains in U.S. equities, helped by sustained economic growth, also improve financial conditions globally, says Andrew Kenningham, an economist at Capital Economics Ltd. in London. Rising stocks boost consumer and business confidence, he says. “The U.S. is becoming less dominant, but it’s still the major player,” he says.
The U.S. has provided the thrust for worldwide growth in every recovery during the past 40 years, according to Stephen L. Jen and Fatih Yilmaz of SLJ Macro Partners LLP, a London-based hedge-fund firm. In 1999, for example, the U.S. accounted for 48 percent of the global economy’s expansion after Asia’s financial crisis, according to data compiled by Bloomberg. The U.S. will lead the way again because of its innovation and technological prowess, Jen and Yilmaz conclude in an October report to their investors.
A U.S. economy with less appetite for emerging markets’ products and imported energy may yet have the power to drive the global economy -- giving it a push that’s less forceful but also doesn’t throw the world off balance.
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