OVER the past decade, the world economy has been plagued by widening imbalances, most notably America’s current-account deficit and China’s surplus—both the largest in the world. There is not much to celebrate about the world economy at present, but at least it is becoming more balanced. Not only are trade gaps in America and China shrinking, but the composition of growth within countries is also looking healthier.
For the first time in years, China’s exports are growing more slowly than America’s. In the 12 months to June (the latest month available for both countries), America’s exports grew by 23%, well ahead of China’s 17% (in dollar terms). Export volumes show a similar trend. China’s rose by 11% in the year to the second quarter, while America’s climbed by 12% (see left-hand chart). Stephen Green, an economist at Standard Chartered, expects China’s real export growth to fall to zero by the end of this year and to turn negative next year.
In July China’s exports surged a mighty 27% from where they were a year before, but this does not alter the picture much. China’s monthly trade figures are notoriously volatile and if exports are converted into yuan—the currency which matters for China’s GDP growth—growth has fallen sharply to an average of 12% in the past three months, from 35% in early 2005. Meanwhile, import growth has quickened over the past year, due in part to higher oil bills. As a result, China’s trade surplus in yuan terms in the first seven months of this year was almost 20% smaller than in the same period of 2007. Even in dollar terms it had fallen by 10%.
That is not to say that there will be a sharp drop in China’s current-account surplus this year. In dollar terms, it is likely to remain roughly as big as in 2007 because higher income from its vast foreign assets will offset the smaller trade surplus. But as a share of GDP, it will shrink sharply because China’s economy is expanding so rapidly. Mr Green forecasts a current-account surplus of 9% of GDP in 2008 and 7% in 2009, down from 11.3% last year. Thus China will be able to claim that its surplus has fallen sharply, even as its critics, in America and elsewhere, will continue to argue that it has barely budged in dollar terms. No one can dispute, however, that China’s exports are growing much more slowly than its economy (which is galloping along at 20% in nominal yuan terms). This is occurring at the same time as America’s export machine has revved up, which is bound to help trade imbalances unwind.
Turning to America, so far the decline in its total trade deficit has been modest, because of the higher cost of oil imports. But the underlying improvement is more impressive. Excluding oil, the trade deficit has fallen by almost one-quarter since 2006. At the same time as exports have soared, real imports fell by 2% in the year to the second quarter, dragged down by weak domestic demand. If the recent drop in oil prices is sustained, the total trade deficit will shrink more rapidly in the second half of this year than it did in the first half. Meanwhile, America’s overall current-account deficit has fallen to around 5% of GDP from a peak of 6.2% in the third quarter of 2006. Merrill Lynch forecast that it could drop to around 3.5% of GDP in 2009.
Bilaterally, it is the same story: America’s exports to China were 20% higher in the first half of the year compared with the same period in 2007, while its imports from China were up only 4%. However, America’s import bill for goods from China is so huge—four times that of exports—that the rising exports have not dented America’s overall trade deficit with China. The changing patterns, buried beneath the headline figures, are very hard to spot.
All hail China’s Olympian shoppers
What has caused the shifts? The cheaper dollar is one factor; until its rebound this summer, it had lost about a quarter of its value on a real trade-weighted basis since its peak in 2002. That not only made American exports more competitive, it made imports into America less attractive. Probably of more importance, though, are the shifts in domestic spending. America’s real domestic demand has stagnated over the past year, whereas China’s has risen by 10% as its citizens have picked up the baton from flagging American consumers. In dollar terms, which better measure China’s ability to buy imports, its domestic spending has soared by a whopping 33%.
Global rebalancing requires a redistribution of growth within countries as well as a redistribution between countries. Until last year, America’s growth was driven by an unsustainable consumer boom; now it is being supported entirely by external demand. Without the boost from net exports, real GDP would have fallen since the third quarter of 2007.
Meanwhile, in China consumer spending is now growing faster than exports (see right-hand chart). Retail sales jumped by 23% in nominal terms in the year to July, and 16% in real terms. Dragonomics, a Beijing-based research firm, estimates that consumption contributed two-thirds of China’s GDP growth in the first half of 2008, up from 44% in 2007.
In America weak consumer spending is likely to continue to dampen imports over the next year or so. Auguring tougher times ahead, the country’s retail sales in July fell for the first time in five months. Less clear is how strong America’s export performance can remain, given the recent rebound in the dollar and slower growth in the rest of the world.
The greenback remains cheap by many measures and so should continue to support America’s sales abroad. Slower growth elsewhere in the world is a more serious concern. Japan’s economy fell by an annualised 2.4% in the second quarter, figures released on August 13th showed, after growing strongly in the first quarter. Growth in the euro area also seems to have come to an end. But these two places account for only about 20% of America’s exports; much more important are emerging economies which now buy more than half of its exports.
Economic growth in developing countries is likely to slow over the coming year. But what matters far more for American exports is the growth in their domestic demand and hence their appetite for imports. Goldman Sachs forecasts that real domestic demand in the four BRIC countries—Brazil, Russia, India and China—will grow by over 9% next year, roughly the same as in 2007 and 2008. If so, this will be good for American exporters.
For all the improvements, trade imbalances are still too big. It is worrying that since mid-July China has stopped allowing the yuan to rise against the dollar; indeed, the currency has since fallen by 1%. China has also increased some tax rebates for exporters. Brad Setser, of America’s Council on Foreign Relations, a think-tank, argues that if China tries to bolster its GDP growth by supporting exports, it will hinder global rebalancing. Instead, with surpluses in its budget and current-account, China should prop up growth by further stimulating domestic demand. That means increasing spending on infrastructure, schools and health care.
To be fair, the yuan has not fallen in trade-weighted terms over the past month, but it is still undervalued and needs to rise further. Mr Setser reckons that given high oil prices and sluggish American demand, China’s trade surplus should already have fallen by more. Likewise, one might argue that without big tax cuts to prop up consumer spending, America’s deficit would have shrunk further. If global rebalancing is to continue, America still needs to save more, and China to save less.
6 months ago