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2014-12-02 11:34:49
A weaker world economy does not hurt, and may help, America
Nov 29th 2014 | From the print edition
THERE is a spring in America s step these days. A revision released this week raised annualised economic growth in the third quarter to 3.9%; it has averaged more than 4% in the past two quarters. The irrepressible stockmarket keeps hitting new highs, the most recent on November 26th. Job growth is accelerating. This is all the more remarkable because the rest of the world has hit the buffers. Japan has slid into recession, Europe is flirting with deflation and China has cut interest rates as growth flags. On November 25th the OECD, a club mainly of rich countries, said its members economies will grow just 1.8% this year and 2.3% next, about half a point slower than projected in May. Risks, it said, are on the downside.
Why the divergence? In part, it is a statistical quirk. America s economy shrank in the first quarter, so its recent strength is from a low base. Output in the third quarter was up an unspectacular 2.4% from a year earlier; the pace of growth in the current quarter will probably be similar. That is still much better than the rest of the world, though, for which there are two main reasons: trade remains a small part of America s economy, and the rest of the world s misfortunes actually help, by lowering interest rates and the oil price.
To be sure, feeble foreign markets have taken a toll: American exports are up just 1% this year while imports are up 3%. Trade has thus been a modest drag on growth, after making a small contribution in 2012 and 2013. Nonetheless, exports, at just 13% of GDP, are less important than in any other OECD country, and exposure to the euro zone is particularly modest. The OECD simulated the external repercussions of a downturn in the euro zone in which expectations of inflation fell by half a percentage point, stockmarkets dropped 10% and households had to pay an additional percentage point to borrow. It concluded that growth would fall by 0.17 percentage points in Britain, 0.15 in Japan, 0.14 in China and just 0.08 in America. While American multinationals have seen foreign profits suffer, domestic profits have more than compensated, so overall profit margins remain near record highs (see chart).
Looser monetary policy in Europe, China and Japan is pushing down interest rates in all those places. That has driven their currencies down and the dollar up about 6% on a trade-weighted basis since July, to the detriment of American exports. But in the long run America will benefit if other big economies stave off disaster thanks to this stimulus; in the meantime, low interest rates around the world have helped to restrain borrowing costs in America, propping up housing.
Subdued global demand has also lowered oil prices, as has stronger supply from both America and OPEC. Surging domestic production and falling imports make cheap oil less of a boost than it once was, but it is still good for the economy.
Bruce Kasman of JPMorgan Chase says only three times in the past 25 years has the dollar risen and oil prices dropped as much as this year: in 2001 and 2008, when the world was entering recession, and in 1997-98, during the Asian financial crisis. The latter event was followed by a consumption boom in America, and he reckons it is the best parallel with the present. Global consumption, he notes, has been inversely related to headline inflation in recent years and this time will be no different. Lower inflation in America, he reckons, will boost purchasing power by 2% at an annualised rate over the current and coming quarters.
There is a potential pitfall, however. Global recessions are seldom spread through trade linkages, but by a common shock, such as a financial crisis or a sharp jump in oil prices. Another European recession or a debt crisis in China could, via financial markets, fray confidence everywhere, America included. That would expose another problem. Although inexpensive oil is good for consumers, it may also lead them to expect lower inflation, thereby raising real (ie, inflation-adjusted) interest rates. There is little the Federal Reserve could do about that: nominal interest rates are already close to zero, and cannot fall below it, since people would just hold their savings in cash instead.