By: Simon Kennedy
April 11, 2014
The U.S. is resuming its role as an engine of global growth, this time one that just putt-putts along instead of purring.
As the International Monetary Fund declares the strengthening U.S. economy is providing a “major impulse” to the world, economists are questioning just how powerful it will prove to be. The U.S. contribution to global expansion from 2014 to 2019 will likely average about two-thirds that of the quarter-century before the recession started in 2007, according to data compiled by Bloomberg based on IMF projections.
“The U.S. is still the most important engine of global growth although perhaps not as much as it once was,” said Mark Zandi, chief economist of Moody’s Analytics Inc. in West Chester, Pennsylvania.
Zandi is among the optimists in arguing acceleration in U.S. growth has spillover effects on other economies by spurring trade and investment. Skeptics at Morgan Stanley and HSBC Holdings Plc say America’s diminished demand for exports and energy as well as the potential for higher interest rates mean it won’t be as helpful as it once was.
What’s driving global economic growth, and what’s holding it back, will be in the spotlight today in Washington where finance ministers and central bankers from the Group of 20 major industrial and emerging economies are convening. At the center of their discussions: Emerging markets such as China aren’t propelling the world economy as much as they did in 2009, when they helped save it from a recession.
The IMF this week forecast China’s economy will grow 7.5 percent this year, the weakest since 1990. China’s slowdown will help to limit expansion in all developing nations to 4.9 percent. Some, including Turkey and Brazil, have suffered bond-market selloffs as investors target excesses such as large current account deficits.
“Emerging markets are still hoping the historical relationships will work and the U.S. will pull them out of trouble,” said Ebrahim Rahbari, a global economist at Citigroup Inc. in London. “We tend to highlight how much less likely that is than in the past.”
The IMF estimates imply the U.S. will contribute about 0.52 percentage point to global growth averaging 3.9 percent annually from 2014 to 2019, according to the data compiled by Bloomberg. While that’s more than the 0.35-point average U.S. contribution for 2008 to 2019, which included periods of contraction during the recession, it still undershoots the averages of about 0.80 point seen in the 1980s and 1990s.
Nevertheless, for Zandi, a one percentage-point pickup in U.S. growth is still enough to boost expansion in the rest of the world by about 0.6 point. In the IMF’s projections such acceleration is at hand, with the U.S. economy set to grow 2.8 percent this year after 1.9 percent in 2013, thanks to record-low interest rates, strong private demand and an end to the fiscal drag that slowed growth in 2013.
Athanasios Vamvakidis, head of Group-of-10 foreign exchange strategy at Bank of America in London, sees the pickup in U.S. growth providing a smaller benefit to the rest of the world of about 0.25 point. Still, he said that amount is significant, and some countries will experience bigger gains than that.
Of 165 countries he studied for an April 9 report, Spain, France, Italy, the U.K., Canada and Mexico would be among those receiving the biggest uplift. Enjoying less benefit would be Japan, New Zealand, Russia, Brazil and China.
Such results suggest to Vamvakidis that investors wanting to position for a stronger U.S. recovery should favor sterling and the Canadian dollar against the yen and New Zealand dollar, while buying the Mexican peso and selling the Brazilian real and Russian ruble.
Emerging markets may already be seeing a pickup as exports to developed economies rose more than 6 percent toward the end of last year, after little change earlier in the year, according to JPMorgan Chase & Co.
The U.S. and western European economies are providing a “very important cushion for emerging economies struggling with significant domestic drags on growth,” said Bruce Kasman, chief economist at JPMorgan in New York.
Not every economist sees a resurgent U.S. as a reason for the world to breathe a sigh of relief. One reason: the U.S. is importing less, as reflected in a shrinking of the current account deficit to $81.1 billion in the fourth quarter, the smallest since 1999 and about a third of the $214.5 billion shortfall witnessed in the third quarter of 2006.
In another sign that demand has tilted away from overseas, Morgan Stanley analysts calculate the growth of non-petroleum imports into the U.S. was 4.4 percent in the final quarter of last year, below the 7.1 percent average of 2003 to 2007.
There is no longer “a consumer of last resort,” said Stephen King, chief global economist at HSBC in London.
A U.S. recovery also may have less of an impact elsewhere because of the declining need for imported energy following advances in techniques at home such as hydraulic fracturing and horizontal drilling in shale rock. Already, net oil imports have fallen to about 5 million barrels a day from a peak of almost 13 million barrels in 2006, and the Energy Department said April 7 that imports may fall to zero by 2037.
“As the U.S. heads toward energy independence one major source of external growth for some countries just isn’t as strong as it was,” said Kit Juckes, global strategist at Societe Generale SA in London.
Emerging markets may have other reasons to suspect they can no longer bank on outside demand, said Juckes. Near-zero Federal Reserve interest rates pushed the dollar down against their currencies in recent years, leaving their exports uncompetitive in world markets. Now, with developing nations accounting for about half of the global economy, “they can’t just outgrow the rest by selling to them, to the same extent they used to,” he said.
A healthier U.S. also could mean the potential for higher borrowing costs worldwide, according to Joachim Fels, co-chief global economist at Morgan Stanley in London. That’s what happened last year when the hint alone that the Fed would soon begin withdrawing stimulus was enough for investors to pull capital out of emerging markets.
“Emerging markets were once a leveraged play on developed markets,” said Fels. “We think the situation has changed.”
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