WHO WILL FUEL ASIA’S EXPORT ENGINES?
01-12-2009
ATI ASIA2010 Magazine
WASHINGTON – The test is on. Who will fuel Asia’s export engines now that US consumers, who spent a whopping US$9.7 trillion in 2007, have cut back on consumption?
Will consumers in Asia step up to the plate? How much of the slack will they be able to absorb, at least in the foreseeable future, as US consumers adjust to a tougher and more uncertain economic environment?
These are vexed questions for which there is no consensus. Some believe that, post-crisis (except for financial linkages), Asia will decouple from the US. Others do not believe Asians are ready to change their cultural habit of saving overnight.
The truth lies somewhere in the middle. However, it can be assumed that the high growth rates that Asian countries enjoyed in the decade until last year will probably not be attainable in the near future – unless of course, Asians dramatically increase consumption of their own output – and decouple from the US (see reports pages 19 and 35).
Based on IMF projections, the US consumer is going to increase savings, and try to restore damage to domestic balance sheets caused by the crisis, at least until to 2014.
Clyde Prestowitz, President of the Washing-ton-based public policy think tank, the Economic Strategic Institute, says: “The decline in US consumption has been greater than the entire Chinese consumption, so China will have to more than double its consumption just to replace the loss of American consumption.”
In 2007, American consumers, who represent five per cent of the global population, spent US$9.7 trillion, while the Chinese, who made up 40 per cent of the global population, spent around US$3 trillion.
Michael Carey, US economist with Calyon, a European investment bank (a division of the large Credit Agricole group), says American households saved five per cent of their disposable incomes in the second quarter of this year, but he admits that the figure could be distorted because of some Government handouts under the US$787 billion stimulus programme.
Nevertheless, he says, the savings rate has jumped from around 1.2 per cent (lower at times) to 5.0 per cent. He estimates that annualised savings of between US$450 billion and US$500 billion are not going into spending.
Richard Berner, Morgan Stanley’s Chief US economist, told ATI that a new era in consumer spending has begun in the US. “The new era of slow growth of consumer spending and the forces involved in that will lift the personal savings rate significantly further – to seven and 10 per cent over time. That will be a good thing,” he says. “This sea change could mean a decade of slower growth in consumer demand.” Berner says private consumption, which used to grow at around 3.5 per cent a year, will be cut by 40 per cent to 2-2.5 per cent a year.
Carey says US consumers face a number of headwinds. Between the second quarter of 2007 and the second quarter of 2009, household net worth declined to US$12.2 trillion, and that includes an uptick in the second quarter – when there was an increase of US$2 billion. “So there has been a negative wealth effect.”
Americans have lost between 30 per cent and 40 per cent of their savings locked into their superannuation scheme, 401K. But most devastating is the destruction of value in their homes. To better understand how the negative wealth impact is affecting spending, a leading US economist gave this example: “I own a vacation home in Lake Tahoe. I bought it for US$450,000 and have a mortgage of US$300,000. The house is now valued at about US$200,000. At one time, the house was worth US$500,000, and I had equity of US$200,000. Now, I don’t have any equity.
I can’t take equity from that house to buy something.”
Even if they didn’t lose the house, American consumers cannot bounce back as before. The consumer spending boom this decade, until 2007, was fuelled by easy credit, allowing US consumers to refinance their homes and extract equity from their homes for consumption.
Carey says US consumers are reducing debt – some voluntarily, some involuntarily. He says American people no longer want exposure to potentially dodgy credit, and they will not consume by borrowing.
In the past, when unemployment has hit
double-digits, savings rates have also risen commensurately, to 10-11 per cent. US unemployment now stands at 9.7 per cent, and economists say it will rise to 10 per cent by year-end.
US economist at UBS, Maury Harris, says: “We need job creation to gain traction before consumers will start to spend again. We are heading in that direction, but we are not there yet. Jobs are going down at a slower rate, but they are still going down too fast to have a recovery. Over the summer, the hiring rate has stabilised, but there are still more layoffs than hiring. In the depth of the recession, in some of the worst months, we were hiring four million people; but 4.5 million people were losing their jobs each month.”
Consumers are responding to Washington’s stimulus programmes. For example, the Federal car programme, Cash for Clunkers, aimed at stimulating the beleaguered car industry and removing old fuel-guzzlers from the road, has worked a trick. “If you give the consumers a good deal, they will go out and spend money,” says Carey. Americans who qualified under the programme got a rebate cheque of US$3,500-US$4,000, and new car sales rose dramatically. Some of this is borrowed from the future. September car sales are going to be horrible, and will fall back dramatically,” he says.
Consumption has risen by 2-2.2 per cent in the third quarter, Carey says, and the figure for the fourth quarter will be smaller, but this should not be read as a “double dip”. The US Bureau of Economics Analysis said in October that personal consumption expenditure increased by US$129.6 billion, or 1.3 per cent, in August. Purchases of cars and car parts accounted for the bulk of a 5.8 per cent increase in sales of durable goods in that month. Asked if the change in spending pattern will be permanent, Carey says: “My parents’ generation, born in the Great Depression, was inculcated with life-long values such as thrift. People are pulling back from expensive purchases. They are not going to feel comfortable spending US$4,000 on a handbag. It looks flashy in this environment.”
He says Americans are replenishing money lost in the crisis. Previously, people confused the value of their home with savings. But he says saving is like being on a diet. “No-one wants to be on a diet forever. There will be pent-up demand, and if the stock market and house prices perform well, they could well loosen their purse strings again.”
Harris says: “My personal opinion is that the savings rate in the US has probably risen as much as it will, and it will remain relatively low and remain controversial.” He does not think that savings will reach the level of 10 or 11 per cent of past economic crises. Although the household sector isn’t as comfortable and wealthy as three years ago, on a per-capita basis, US households in terms of assets are still much better off than they were 25 or 30 years ago.
“Part of the savings rate issue is the debt issue. I would contend that the debt burden is coming down because you can refinance at
a lower interest rate. And those who have defaulted have been relieved of the heavily responsibility of servicing their mortgage. That takes pressure of the budget. It means money is left over for other things.”
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