Economic crises sow confusion, yet they are generally logical. Much of the decline in world trade fits into the category. The correction of excesses has been brutal. Trade imbalances about which economists had warned for years are correcting in months. The process carries the risk of protectionism and depression, but the worst of it could soon be over. Then there may be another risk – a return to the old imbalances.
As with banks and property prices, the trade excess started in what might be called its homeland. The world’s biggest economy, the United States , had a deficit on current account, the broadest measure of trade, of $788bn in 2006, or 6% of GDP. This implied an equally huge capital sum needed to flow into the US every year. The money came and the external debt soared, with China, the biggest beneficiary of booming US imports, the chief creditor. China now holds $740bn in US Treasuries—a rise of $247bn in just the past year.
But ever since the US economy began to falter a correction has begun in US consumer spending and in world trade. An element in the correction was the collapse in the dollar in 2007-8. That helped the US by making exports more competitive and imports more expensive. Soaring world oil and commodity prices, however, hampered progress in reducing the US current account gap.
Outright recession, however, has made a gentle correction violent. In the third and fourth quarter US consumer spending contracted. Such falls are as rare as comets. The last passed by in 1991. The result is that the volume of US imports dropped at an annualised rate of 16% in the fourth quarter of 2008. This enormous fall followed smaller ones in five of the six previous quarters.
In addition, global recession has hammered oil prices. The US import bill is shrinking. The result is that the U.S. current account deficit dropped in the fourth quarter of 2008 to $133bn, the smallest figure since the fourth quarter of 2003, and equivalent to 3.7% of GDP – still large, but well down on 2006.
In the world economy, the sudden belt-tightening of the US consumer glutton has had far-reaching effects. US data show that imports from Japan in November to January were down by 22% on a year earlier, from Germany by 15.5% and from China by a much more modest 4%. Chinese export data for February, however, shows a far more dramatic decline in exports (to all countries) of 26% on a year earlier.
As exports plummet, factories around the world are cutting output – and therefore jobs. Japanese industrial production was down by a staggering 31% annual rate in January and Germany’s by 19%.
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The plunges produce trade friction. Here and there protectionism has fluttered. The world’s leaders, fortunately, are mostly resisting its ugly lure. If they were to fail to, the world’s current economic decline would turn to depression. The more likely course is that the pace of contraction in trade, industrial production and economic growth becomes much less alarming.
That stabilisation would again stem from the US: from the partial healing of its excesses, and from the huge amounts of stimulant the authorities are pouring out in order to get US consumers moving again. The tentative signs of healing are there. The US personal savings rate, which flirted with zero in the boom years, rose to 5% of disposable income in January. US housing starts rebounded strongly from multi-year lows in February.
None of this is enough to suggest the sick US patient is fit to leap from the bed. Yet the US authorities are trying to make that happen. If all goes well, the decline in the US current account gap may level off by the third quarter of this year. Over-stimulated with government funds and Federal Reserve credit, the US economy will revive – just as it did in 2002.
That will be welcomed but will not be entirely good news. The current account deficit may soon begin to widen again as the US seeks to resume living far beyond its means. And yet the export growth China, Germany and Japan enjoyed in recent years will be unlikely to return. For these economies, adjustment to a new reality will continue.
And in the US the questions will remain, what happens when super-stimulus is taken away? And when will stability that does not require rising foreign borrowing be found?
