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.