Can China really fill the boots of the US consumer?

Posted on 19 May 2009 with no comments from readers

The revelation from President Obama’s economic advisor Martin Feldstein that the stimulus package this year will only make up for less than half the damage to the economy caused by the crisis is a reminder that a true economic recovery may be a long way off (see separate article).

In a presentation to Citi Private Bank clients yesterday in the UAE economic consultant Ann Wyman gave a more upbeat assessment of the green shoots of economic recovery such as consumer confidence and better housing market figures, but she posed some awkward questions about how a recovery might proceed from here.

‘How does the world get back to economic growth without the US consumer? Can the emerging economies like China take up the challenge? And will China and other sovereign wealth funds increasingly spend on their own development, and then who will buy US treasury bonds?’

Tough questions

These are difficult questions to answer, and yet without answers there will be no meaningful global economic recovery.

For we know that the US consumer can not lead it. US consumers are burdened with debts and negative equity in their homes, and unemployment is rising, which promotes saving and not spending.

The chinese economic stimulus package is huge in relation to GDP and has certainly given domestic demand a big kick this year. So big indeed that some measures have already been reigned in to avoid over-stimulation, one reason for the recent surge in commodity prices such as oil.

But at the same time chinese exports have tumbled over the past six months and were down 23 per cent in April, the worst monthly total for six months suggesting that the export position is still deteriorating and shows no sign of bottoming out.

Spending power

Of course, the stimulus money then has to come from somewhere, and that has to be the very foreign currency reserves that China has previously been investing in US treasury bonds.

Who will buy those bonds now to support the US economy with low interest rates? If the US public has to fork out for bonds it will demand higher interest rates, but China has kept on buying them thus far.

In Ms Wyman’s view the US faces a long period of slow growth and a jobless recovery with the government now seen as the solution to economic issues rather than a part of the problem. This is a major change and puts a large onus on China to fill the boots of the US consumer.

The problem is that the chinese economy is less than a third of the size of the US economy and has a billion people to look after, so this is probably impossible.