Monday, December 07, 2009

Global Consumption Blues

Economists at Credit Agricole provide us with their insights into conventional economic heavyweight - the US household consumption. The conclusion is rather straight forward:
In conclusion, the main question is whether the crisis has changed the mindset of US consumers in particular and of the United States in general: will they henceforth be more inclined to live within their means? And if so, what does that imply for US growth? A considerable number of macro-economic determinants point to an affirmative answer and hence, probably, to slower growth. But there is no guarantee of that, given the Americans’ unchanging ability to press on regardless.
On the other hand, Michael Pettis discusses, in the unconventional way, the hope for Chinese consumption. There are couple of paragraphs I would like to point out:
At roughly $1.2 trillion in 2008, total Chinese private consumption is only a little more than that of France (around $1.0 trillion) and still less than that of Germany (about $1.3 trillion, not to mention the UK’s $1.4 trillion and Japan’s $3.2 trillion). This fact alone should cause us to be extremely skeptical of feverish claims about the role Chinese consumers can play in making up for any contraction in US consumption – which at roughly $9.4 trillion last year is nearly eight times the size of China’s – without even taking into account that Europe and Japan are likely to exacerbate, rather than help absorb, the contraction in US net demand.
This should be the flower:
Crises seem to drive the household consumption rate down, even though bull markets don’t seem to drive it back up. Is that because crises cause households to worry about risk (although if that were true they wouldn’t go permanently down, would they)? Or is it because the government responds to crises by increasing the amount of misallocated investment, the consequence of which is to reduce future consumption? Government consumption, by the way, has stayed pretty steady, at around 15% of GDP, during that period.
With longer term perspective:
Look at it over the longer term. Just to return consumption to 40% of GDP over the next five years (and even that level is widely considered to be way too low, and probably unprecedented in the world excluding recent Chinese history), 8% average annual growth rates in GDP would require a tad under 11% annual growth in consumption. Similarly, 7% average annual GDP growth rates would require that consumption grow annually over the next five years by nearly 10%. To bring Chinese consumption in 20 years up to 50% of GDP, which is the low end for other high saving Asian countries, and far lower than any other large economy in Asia (and remember that large economies are less able to rely on exports to fuel growth than small countries), 7% annual GDP growth would require average annual consumption growth of just under 9% for twenty years.
To sum up, in order to compensate 1% decrease in nominal consumption in developed world (US, EU and Japan) combined, the nominal consumption in China should grow at ca. 20% rate ...

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