What Happened To The Trade Numbers?By
"Whoa, mama, stay up!"
Bill Clinton was exhorting a wayward golf shot during his vacation on Martha's Vineyard, but he might as well have been talking about the global economy. After three long years of malaise, much of the world economy is still losing altitude. Forecasts of European and Japanese growth have fallen sharply since spring, and European consumer confidence has plunged to record lows. Most disappointing of all, even Mexico and China--which were supposed to be the big success stories of the 1990s--are struggling with self-induced slowdowns.
All this turmoil abroad is having a dramatic and unwelcome impact on the U.S. economy. In the first half of 1993, the U.S. trade deficit soared to $112 billion, up from $72 billion a year earlier. That cut about 1.5 percentage points off growth, the biggest drag from trade since the import invasion of the early 1980s (chart). In effect, the U.S. is importing everyone else's recession.
With the world economy still missing any real engine of growth, the next year or so doesn't look much better. "We're facing a bleak 6 to 12 months of export demand," says David Hale, chief economist at Kemper Financial Services Inc. "The trade account could help us in 1995 and 1996, but it's going to hurt us through the middle of next year." Agrees John P. Lipsky, chief economist at Salomon Brothers Inc.: "Look over the horizon, and 1995 is the year when you can conceive of mutually reinforcing growth."
BACKFIRE. Take Mexico. Last year, the U.S. ran a big surplus, sending some $40 billion in goods south of the border. But Mexico's economy is expected to grow by only 1.5% in 1993--down sharply from 2.6% last year--and Mexican factories have cut back drastically on purchases of machinery and other capital goods. As a result, U.S. export growth to Mexico has slowed sharply, from 22% in 1992, to only 4% in the first half of 1993.
Why has the Mexican economy suddenly lost its spark? In part, it's because President Carlos Salinas de Gortari has deliberately boosted interest rates to attract foreign investors and fight inflation. That's the same decision Federal Reserve Board Chairman Alan Greenspan made in 1988 and 1989, when he raised the federal funds rate from 6.5% to almost 10%. And just as those rate increases set the stage for the 1990 U.S. recession, so could the Salinas rate increases backfire as well.
Mexicans were expecting a slowdown, but nothing this serious. "I think most people, including the government, underestimated the effects of this tight monetary policy," says Jonathan E. Heath, chief economist of Macro Asesoria Economica, a consulting firm in Mexico City.
Some of China's voracious demand for imports is easing as well, as the government clamps down on credit and slows growth in an attempt to cut inflation. For example, China was one of the world's biggest buyers of steel for much of 1993, helping make up for weak demand in Europe and Japan. But China's steel orders have slowed dramatically since June, creating a glut of some types of steel products.
Neither Japan nor Western Europe is likely to take up the slack anytime soon. Japan's economy, suffering from weak capital spending and the strong yen, probably contracted again in the second quarter. And the decline in the German economy, estimated to be 2% this year, may continue into next year. With the Bundesbank still maintaining its tight-money, inflation-fighting policies, "Germany is heading for a double-dip recession" in 1994, says Giorgio M. Radaelli, an economist at Lehman Brothers. Indeed, German companies are still laying off workers in droves: Mercedes-Benz on Aug. 24 announced it will cut 14,000 more workers from its German payroll next year.
TWO CYLINDERS. The slide in Europe is hurting such companies as Hewlett-Packard Co., which reported slightly lower-than-expected earnings on Aug. 18 because of a big slowdown in orders from some overseas markets. "We've been consistently writing down our expectations for Europe," says HP economist Richard C. O'Brien. Compared with the computer maker's forecast six months ago, he says, "we're putting off by 6 to 12 months the timing of the recovery. I'm not convinced the bottom has been found yet."
Are there any bright spots in the world economy? It may be hard for an unemployed manager or defense worker to believe, but the U.S., weak as it is, is now the major source of global demand growth, with imports expected to rise by some 10% this year. Import demand is still rising in Pacific Rim and Latin American countries such as Taiwan and Argentina. And eventually, falling interest rates in France, Britain, and even in Germany should boost their economies as well.
But even when the European rebound finally arrives, it will likely have the look and feel of the weak U.S. recovery. That means in the longer run, the emerging economies such as Mexico and China are still the best bet for driving world growth, once they have dealt with their inflation problems.
An export-led recovery, when it comes, would be welcome news for the growth-starved industrialized nations. But for now, the world economy looks stuck in a slow-growth rut. The U.S. may stay up, mama, but only barely. And no one else is making the green.