Global growth: Now or never
Stephen S. RoachTime and again, the lessons of a troubled world economy are the same: An unbalanced world is an unsustainable world.
A decade ago, the world had just come through three difficult events in the span of three years – the Asian financial crisis, the Y2K scare, the bursting of the U.S. equity bubble. The unbalanced world was ill equipped to deal with the asymmetrical shocks bound to follow. Steeped in denial, an unstable global economy continued its race to the edge.
The price for denial was steep. The world peered into the abyss in late 2008, experiencing the greatest financial disaster since the Great Depression of the 1930s. Sadly, this was just the latest in a steady string of crises over the past 30 years, including the 1980s Latin American debt crisis, the subprime crisis and the European sovereign debt crisis raging today. Behind most of these crises is a major macro imbalance, which could have been avoided with pro-active, disciplined and responsible policies. But the temptations of false prosperity proved far too alluring.
It’s essential to understand the forces at work on both sides of the unbalanced global macro equation. The demand side is dominated by the American consumer. With about four per cent of the world’s population, US consumers spend about $10.7 trillion annually. By contrast, China and India, collectively comprising nearly 40 per cent of the world’s population, have combined consumption of about $2.5 trillion.
China did what it needed to do to sustain economic growth and maintain social stability in the midst of wrenching crisis. Still, renewed weakness on the demand side of the global equation has pushed its GDP growth back down to 7.6 per cent in mid-2012 – holding to a soft-landing trajectory, but yet another important reminder that China must change its growth model to derive greater support from internal demand, especially private consumption.
Fortunately, China is in good shape, with plenty of ammunition to deploy countercyclical stimulus in order to avoid the dreaded hard landing and get on with structural rebalancing. Short-term policy benchmark lending rates of 6.0 per cent are well above CPI inflation of 2.2 per cent and a fiscal deficit of less than two per cent of GDP is one of the lowest in the world.
Predicting sources and timing of the proverbial next crisis are near impossible, but there are two destabilizing scenarios to ponder:
First, the full risks of a sovereign debt overhang haven’t played out yet. With long–term government interest rates remaining low, there’s a false sense of complacency. In 2011, debt exceeded 100 percent of GDP for the broad collection of so-called advanced economies for the first time since the end of World War II. The overly-indebted can finesse this problem for the time being, but probably not much longer.
Second, the world’s most important economic relationship between the United States and China could fall victim to its own set of imbalances. Particularly troublesome is Washington’s bipartisan penchant for China bashing, with demands that China be forced to raise the value of the renminbi or face trade sanctions.
This is the wrong response. The U.S. suffers from a multilateral trade deficit – characterized by imbalances with 88 countries in 2010. It’s impossible to fix a multilateral imbalance by putting pressure on a bilateral currency. Instead, Washington must come to grips with its own unprecedented shortfall in national saving. Lacking saving and still wanting to grow, the US must import surplus saving from abroad – running massive current account and multilateral trade deficits to attract the foreign capital.
The global rebalancing agenda would be better served if the U.S.-China trade relationship were recast as an opportunity. For a growth-starved US economy hobbled by sluggish consumer demand, exports could become an important source of growth. China is America’s third largest and most rapidly growing export market. The US focus needs to shift toward market access – ensuring that its companies have a fair shot at Chinese markets as that nation ushers in what could be the greatest consumption story of the modern era.
In short, the outlook for sustainable world growth depends critically on how the United States and China address rebalancing imperatives. Advanced economies, especially the United States, must consume less and save more. The developing world, especially China, has no choice other than to draw down its excess saving and consume more. The sooner the world faces up to these urgent rebalancing imperatives, the better.
Stephen S. Roach, a member of the faculty at Yale University, was formerly chairman of Morgan Stanley Asia, and is the author of “The Next Asia.” This abridged article originally appeared in the Khaleej Times.