US consumers can't save us from global recession for ever
Friday 12 March 1999
On Wednesday Robert Rubin said it again. "This is not," he said, referring to the imbalance between growth in the US and the rest of the world, "a long-term healthy situation. To have a healthy global economy over a sustained period of time, all the major parts need to be healthy." He still expected the US to have solid growth this year, but was concerned about the prospect for 2000 and beyond. Europe and Japan had to pump up domestic demand.
Eventually they may - more of that in a moment - but meanwhile how long can Americans continue to go on boosting spending? Here, on Rodeo Drive, the epicentre of West Coast American consumerism, the boom continues with determined zeal. To the British visitor the most revealing aspect of shopping in Los Angeles is that you don't even need to park your car. The store does that for you. If valet parking were brought to Brent Cross think how much more rewarding the shopping experience would be. America offers not only an abundance of goods; it also offers, at least for the rich, an abundance of service.
But, of course, American consumption is not sustained just by the glitzy West Coast. You would expect, given what has happened to income differentials, the rich to be self-confident about their economic futures and to want to show it. What is perhaps more remarkable is the breadth of the boom, for the not-so-well-off are spending more too. That shows in the savings figures, or rather lack of savings figures, for household saving went negative last autumn. For the year as a whole it was only 0.5 per cent, the lowest level since 1933.
Much of the confidence supporting this spending must be the result of rising share prices, rather as Britons in the late 1980s were prepared to carry on spending because they felt rich on the back of rising house prices. The Dow Jones index hit another all-time high this week and seems to be heading towards the 10,000 mark. This leads to the obvious question of what might happen were Wall Street to fall sharply.
BUT WALL STREET hasn't. And in any case there is such momentum behind the spending boom, it will surely take some time to slow down. In January it climbed by $14.7bn, the largest increase for three years. The result of such confidence by consumers is shown in the graph: the US looks like having another year when growth in consumption, at 3.8 per cent, will exceed growth in the economy as a whole of 3.4 per cent. No other Group of Seven country seems likely to reach 3 per cent growth either in consumption or in GDP this year.
The proportion of consumption to GDP will therefore rise further. It is already (see graph) the highest of the G7 countries at nearly 68 per cent of GDP, more than 10 percentage points higher than Germany. There is nothing wrong with reasonably high consumption rates in the sense that the whole purpose of an economy is to give people the best possible standard of living. The popular view that consumption is somehow bad and investment good ignores the fact that a lot of what is classed as investment may simply be wasted, as Japan has shown.
Using investment efficiently is much more important than simply having a lot of it. (A good example is nuclear power. Nuclear power stations cost roughly three-times as much as conventional ones, so switching from conventional to nuclear power shows up as higher investment. But the actual power produced is no higher and consumption has had to be lower. Society is poorer as a result.)
Nevertheless, if high consumption shows up in a wide current account deficit as it has in the US, it does ultimately become unsustainable. The deficit is now 3 per cent of GDP. UK consumption is relatively high too, but while the current account has deteriorated sharply since last summer it was actually in surplus in the first part of 1998, and the deficit will still be only about 0.5 per cent of GDP this year. We are more or less OK - the US is pushing the limits.
WHAT THE US consumer is doing, however, is enormously helpful to the world economy at this particular time. If the forecasts for strong consumption growth in the chart are right, and if Mr Rubin is also right in expecting solid US growth this year, then there is a window of opportunity for Europe and Japan to stoke up demand so that the baton can be passed from America to the rest of the developed world by 2000.
Assume then that the US consumers can be relied upon to deliver good growth this year. But assume too that if they weaken the problem will be translated quickly into share values.
Just this week a survey by Mercer Management Consultants looked at 100 of the top 1000 US companies that had suddenly lost 25 per cent or more of their stock market value in recent years. The most important single reason for that loss of value was unexpectedly soft consumer demand. It is very easy to paint the gloomy scene of a weakening in consumption leading to a fall in share prices, which in turn would lead to a further weakening in consumption, and so on.
The key will be Japan and Germany, partly because their size is so great. Private consumption in Japan and Germany combined is $3,750bn, compared with the US at $5,500bn. No other country in the world consumes over $1,000bn - Britain and France are each about $850bn.
The Japanese tale of woe continues almost certainly for this year and the best hope is that growth will be resumed at last by 2000. Germany, you might expect, would profit from the general European upturn, but the fact that growth was negative in the last three months of last year is ominous. German consumers say in surveys that they are becoming more optimistic, but do not yet seem to be buying much more.
At least the big picture of the world economy is becoming clearer. We know the two questions. Question one is: will the US consumers carry on spending hard until demand elsewhere picks up? And question two is: when they ease up, will Japanese and German consumers pick up the running?
The intuitive answer to the first question, which I think anyone spending some time in the US would give, is that the boom still has considerable legs. Americans are very self-confident at the moment. They are doing the world a great service. It is their patriotic duty to spend money. They will shop till they drop - or at least till Wall Street drops.
For Japan and Germany, of course, the mood is utterly different. It is their patriotic duty to be cautious and save money. Consumption will eventually recover, for it always does. But they need to learn a little of the Rodeo Drive culture if they are to save the world economy. Maybe they should introduce valet parking for shoppers in Tokyo and Berlin.
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