Global economic commentary from Stephen Roach of Morgan
Stanley:
morganstanley.com
<Global: The Long Road
Stephen Roach (New York)
I continue to believe that the rebalancing of a lopsided, US-centric global economy will be the big macro call over the next three to five years. There are two principal avenues by which such a realignment can occur — a shift in the world’s relative price structure (i.e., foreign exchange rates) and/or a change in the mix of real growth among the major countries of the world. The evidence suggests that the process has barely begun.
It’s worth reviewing the gravity of the problem. Based on revised IMF data, it now appears that the United States accounted for fully 98% of the cumulative growth in world GDP over the seven-year period, 1995 to 2002 (the prior data put that share at 96%). America’s growth contribution over that interval was more than three times its 30% share in the global economy. Conversely, this calculation also means that the remainder of the world economy — some 70% of global output — collectively accounted for only 2% of the cumulative increase in world GDP over the 1995 to 2002 time frame. This is a truly astonishing result. Never before has the modern-day world economy experienced such a protracted period of unbalanced growth.
These calculations are based on market exchange rates — adding up dollar-based measures of GDP for the world’s various economies. This is in contrast to the purchasing power parity (PPP) metric that we normally use to assess global growth. The PPP construct is designed to purge the transitory impacts of currency fluctuations, enabling us to get a cleaner read on the world’s underlying growth dynamic. By contrast, at market exchange rates, the global growth dynamic reflects the interplay between currency swings and country-specific growth disparities. As such, it captures the full array of forces that generate global imbalances. And in doing so, it also provides hints as to how any subsequent rebalancing could occur.
The global imbalances that emerged over the 1995 to 2002 period were a by-product of two major trends — a sharp widening of the growth gap between the US and the rest of the world and a sustained rise in the foreign exchange value of the dollar. Real GDP growth in the US averaged 3.3% per annum over this seven-year period; that’s fully one percentage faster than 2.3% average gains recorded in the remainder of the industrial world (i.e., the euro zone, Japan, Canada, Australia, the newly industrialized economies of Asia, and a broad array of smaller advanced economies in Europe). The growth disparities were most pronounced in the first five years of this seven-year interval, 1995 to 2000. Over that period, real GDP growth averaged 4.1% per annum in the US, more than 50% faster than average gains of 2.7% elsewhere in the industrial world.
A sustained increase in the foreign exchange value of the dollar was the icing on the cake for the global imbalances that have opened up in recent years. After hitting a record low in the summer of 1995, a broad index of the trade-weighted dollar rose about 34% through early 2002 (in real terms). Looking at the combined impacts of currency swings and growth disparities — and adjusting for inflation differentials (i.e., America’s 1.7% average increase in its GDP deflator over the seven years ending in 2002 was slightly higher than average gains elsewhere in the advanced economies) — it is possible to parse out the major forces driving the world’s imbalances. By my reckoning, America’s 98% contribution to the cumulative increase in world GDP growth over the 1995 to 2002 period can be broken down as follows: About two-thirds of it appears to reflect growth disparities, and about one third is traceable to currency shifts.
It’s in that context that we can assess any progress that is now occurring on the rebalancing front. The good news is that some improvement is now evident. Based on recently updated estimates of the world GDP aggregate by the IMF, there was a significant reduction in the US contribution to global growth in 2003. By our reckoning, the US accounted for just 13% of the total increase in world GDP last year — less than half its 30% share in the global economy and far short of the 98% contribution over the seven-year period, 1995 to 2002. The reduced share, however, is not attributable to any narrowing of growth disparities between America and the other major economies of the world. In fact, US real GDP growth of 3.1% in 2003 was actually stronger than the 0.4% increase in the euro zone, a 2.7% gain in Japan, and a 2.2% increase in other advanced economies. Absent a narrowing of growth disparities between the US and the rest of the world, virtually all of the rebalancing has thus far occurred through the currency. This reflects a 13% decline in the broad trade-weighted dollar index (in real terms) from its highs of early 2002 — an index which has subsequently rebounded by about 2% in the past few months.
The bad news is that one year of progress barely makes a dent in alleviating the massive imbalances that have built up in the global economy over the past eight years. My guesstimate is that only about 10% of the cumulative imbalance that opened up over the 1995 to 2002 period has now been eliminated — a calculation that reflects the 13% drop in the broad trade-weighted dollar, partly offset by America’s lingering growth advantage. That still leaves about 90% of the journey to be completed — underscoring the obvious and important conclusion that the heavy lifting of global rebalancing has barely begun.
The persistence of global imbalances is corroborated by the unprecedented disparities that continue to exist between the external accounts in the major economies of the world — mainly America’s record current account deficit and Asia’s outsize surpluses. In the second half of 2003, many believed that America had finally turned the corner on its balance-of-payments problem. Largely reflecting a narrowing of the US trade deficit over the March to November 2003 interval, the current account share of US GDP actually moved down from 5.2% at the start of last year to 4.5% by the final period. The hope was that global rebalancing would be a natural and relatively painless outgrowth of a turn in the global business cycle.
I must confess that I was always suspicious of the narrowing of the trade gap in late 2003 — especially since it reflected a surprising shortfall of import growth for an economy where domestic demand was surging. With America’s import penetration at historical highs and currency responses typically working with long lags, it seemed far too early in the game to expect a major deficiency in import demand. Given persistent disparities in the mix of global growth, it also seemed especially far-fetched that global rebalancing could be driven by a relatively modest currency correction. The just-released record $46 billion trade deficit for March 2004 is certainly consistent with these suspicions. By hinting at a renewed widening of America’s still-gaping current account deficit, it underscores the lasting and potentially dangerous impacts of outsize global imbalances.
All in all, the progress report on global rebalancing is far from encouraging. So far, any realignment in a US-centric world economy has been modest and accomplished mainly through a relatively limited decline in the US dollar. A shift in the mix of the underlying global growth dynamic has yet to occur. If rebalancing continues to be channeled mainly through currency adjustments, there would have to be a sharp further decline in the dollar. The only way to avoid that outcome, in my view, would be for a significant reversal to occur in the growth disparities between the US and the rest of the world. This would most likely entail a major shift in the mix of global growth — away from America and back toward Europe and Japan in the developed world and into China and India in the developing world. Until the adjustment process enters that more fundamental phase, I believe any recovery in the world economy can only be tenuous, at best. It’s likely to be a long and arduous journey on the road to global rebalancing.> |
