America not driving global recovery

This blog post was first published on Fundweb today.

Those who believe that America’s recovery will lead it to regain its role as driver of the global economy are deluding themselves.

Even leaving aside the flimsiness of America’s recent growth spurt it is many years since it was the engine of the world economy. For over a decade the developing economies, and China in particular, have driven global growth.

The headline figures alone put the claims of America’s boosters into question. Figures published recently by the Organisation for Economic Cooperation and Development show American GDP growing at 3.0% in the final quarter of 2011. Slightly lower growth is expected in the first half of this year. In contrast China’s growth target for 2012 was recently lowered to 7.5%.

Admittedly the American economy, when measured at market prices, is still about twice the size of the Chinese economy. But it still looks extremely likely that China will contribute more growth to the global economy in absolute terms even if America retains its recovery path.

In any case the benign assumption for American growth is far from guaranteed. The main indicators highlighted by bulls on American growth are all superficial.

All of the positive signs – a falling jobless rate, rising consumer confidence, a recovery in bank credit, surging equity a recent Perspective column prices – can be attributed largely to the huge economic stimulus. As I pointed out the Federal Reserve injected $2.3 billion into the economy between 2008-2011. That a third round of quantitative easing (QE3) is even being considered underlines how much the American economy remains dependent on artificial stimulus.

In any case it is a misconception to talk about America “returning” to drive the global economy. The idea that the American consumer propelled the global economy in the run-up to the crisis in 2007-8 is a myth.

Larry Summers, a former American treasury secretary, was right to argue during that period that the world economy was “flying on one engine”. But the engine was not, as he contended, the American consumer.

Instead it was the growing productive power of China that drove the world economy before the crisis. Chinese dynamism has also meant that the global recession was much less severe than it would have been otherwise.

Essentially China’s rapid growth over many years meant that, in effect, it subsidised American consumption. China bought American Treasury bonds that in turn meant that interest rates could be kept low. Americans were buying Chinese goods with Chinese-backed credit.

There were problems in both side of this relationship but the American element was more severe. It certainly would have been better if China would have raised domestic consumption rather than subsidising the purchases of relatively richer Americans.

But America’s failure to harness capital imports productively was an even more damaging failure. It meant that Chinese capital helped finance an American bubble rather than enabling productive investment.

In any case there should be no doubt about the real drivers of the global economy in recent years. Statistics from the World Economic Outlook Database illustrate the shift. China only represented about 7% of global output back in 2000 whereas America accounted for about 24% (at purchasing power parity). By last year the corresponding figures were 14% for China and 19% for America.

China, rather than America, is the clear driver of global growth.