February 16, 2007

A RISING U.S. LIFTS ALL BOATS:

Emerging economies are edging further out of the wilderness: US dominance had more to do with European failure than with a new lease of life within the US economy (Stephen King, 05 February 2007, Independent)

If there's a lesson from my Bulgarian trip, it's that Bulgarians - and presumably many others who lived in repressive regimes - were desperate to emulate western lifestyles. Given the opportunity, they would happily consume all manner of products, even at ridiculously inflated prices or, in the case of my jeans, with worryingly poor standards of hygiene.

The end of this repression has unleashed a huge wage of additional demand in the global economy that is changing the balance of economic power across nations. Every year, as previously repressed economies make further steps out of the economic wilderness, economic relationships change. One consequence of this has been the declining relevance of the United States.

This is not to say that the US is unimportant. Rather, the global economy no longer depends on the US for its momentum. Last year, the US housing market collapsed. As a result, US domestic demand and import growth came in below economists' expectations.

Now, imagine you are a rather unusual economist, someone who is able to look at future domestic US economic developments with perfect foresight, but who has no more knowledge than anyone else about the rest of the world. What would you do armed with information that told you that US domestic demand was going to be disappointingly weak? I'd imagine you'd be tempted to slash your export forecasts for America's main trading partners. The next step would be to use those export downgrades to predict income losses and, hence, weaker consumption and investment elsewhere in the world. It wouldn't be long before you'd be worrying about a global economic downturn.

Last year, your perfect foresight would have been of no help at all. Although US demand was weaker than expected, the rest of the world absolutely boomed. US national income was still able to rise by a healthy 3.4 per cent because US exports were lifted by strong consumption and investment demand elsewhere in the world.

And who was doing all this spending? Out of the top 10 destinations for US export growth, five - Mexico, China, South Korea, Brazil and the United Arab Emirates - were emerging markets. Mexico's and China's contributions were double those of Germany and the UK, eight times bigger than those of France and 16 times bigger than Italy's.

Posted by Orrin Judd at February 16, 2007 7:23 AM
Comments

Wait! the US housing market collapsed? Why didn't anyone tell me?

Posted by: Patrick H at February 16, 2007 2:37 PM

Patrick you may not be aware that collapsed means it went up 300% and then declined by 30%.

Posted by: erp at February 16, 2007 3:39 PM

That is why only John Kerry worried about how the French regarded us, Bush practically ignored the Euros and cosied up to the Indians and the Mexicans.

Posted by: ic at February 16, 2007 5:48 PM

Erp,
My homes value has only increased 87% since I bought it less than 7 years ago. Wow, did I ever get a raw deal? It never even went up 300% before I had to suffer through a piddling $160,000 increase in my net worth.

Posted by: Patrick H at February 16, 2007 6:44 PM

Patrick, sorry for your tragic loss.

Posted by: erp at February 17, 2007 8:12 AM
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