In the first part of the decade, with Japan still stagnating and Europe flirting on-again, off-again with recession, analysts spoke over and over of America as the engine of global economic growth. This went on for so long that I simply ran out of train metaphors while writing for the Economist.
Prospects have gotten a little perkier over the last eighteen months; Japan seemed to be (finally!) pulling out of its decade-long doldrums, and France and Germany posted growth rates that were, if not exactly roaring back, at least very solid.
But the promise has not quite played out, as the Wall Street Journal chronicles:
The notion that the rest of the world has "decoupled" from the U.S. came into vogue earlier this year, as overseas economies -- particularly emerging markets -- continued to post robust growth and Europe and Japan appeared to be enjoying a long-delayed upturn.Policy makers joined the decoupling parade. In the spring, the IMF included a chapter in its April World Economic Outlook called "Decoupling the Train." The gist: The current weakness of the U.S. economy stems largely from housing woes -- and housing is less global than, say, computers and other parts of the U.S. economy. That is good news for the rest of the world.
But the U.S. is now flirting with something more severe than a mere slowdown. That -- along with rising oil prices and the specter of a global credit crunch -- is changing the picture.
Europe is showing signs of faltering, while Japan may be at risk of sliding back into recession. While developing economies like China are still on a steady boil, recent drops in their stock markets suggest investors are beginning to doubt their immunity to a U.S.-led slowdown.
Germany and Japan may be growing, but they're extremely dependent on exports, which means they won't serve as the markets that fuel growth in the rest of the world. That, for too long, has been America's job. Now that we're ready for retirement, it seems we forgot to train our replacement.
Germany and Japan have relied on other countries--especially the United States and China--for too long. There are serious structural problems in both countries that have stifled entreprenuership, innovation and growth.
I just don't believe in the supposed decoupling because I don't see the dynamism in these countries that would be required for growth if the US and China both slowed down.
"This went on for so long that I simply ran out of train metaphors while writing for the Economist."
"Now that we're ready for retirement, it seems we forgot to train our replacement."
BA-DUM-CHING
Germany and Japan may be growing, but they're extremely dependent on exports
Actually, Japanese merchandise exports as a % of GDP are on the order of 12-13%, which is very low for a large economy. Only the US has a lower level among the major economies. And if you look at merchandise + service exports, then relatively speaker (i.e., relative to other countries) Japan is even lower since it has quite low service exports.
I doubt that Japan or Germany could become the "engine of global economic growth" as they are just too small.
The US GDP is about 12 trillion with a labor force of 800 million while Japan's is 4.2 trillion (labor force of 67 million) and Germany's is 2.6 trillion (labor force of 44 million).
China or India is the most likely replacement, in the long term. China's GDP is 10 trillion with a labor force of 800 million and a huge, untapped population. India's GDP is only 4 trillion with a labor force of 500 million. It also has a huge, untapped p0opulation.
Both China and India need a lot of work (education, infrastructure, capital investment) before they are ready to drive the world economy, but they have the people to do it. Japan is just too small and can't grow and are moving in the direction of fewer people working and more retiring. Same for Germany to a lesser extent.
I would have actually guessed that Brazil should be on the list, but it has a surprisingly small (to me) population.
All numbers from the CIA World Factbook.
EI
EI: The India and China GDP figures above are on a PPP basis, which really is not relevant for discussing ability to import (and thereby drive world growth). Imports are paid for on a nominal basis, so nominal GDP figures are more relevant, which for India and China are much much lower than the PPP GDP figures.
The Journal article itself is strange. The notion that weakness in housing is good news seems misplaced since housing appreciation has been the vehicle behind US consumer spending (i.e., refinancing to pull equity of the house), and this in turn has driven imports since US has a very high import income elasticity. Borrowing on home equity is not income, but there's no evidence that consumers treat the money differently than income.
The US GDP is about 12 trillion with a labor force of 800 million
All numbers from the CIA World Factbook.
EI, did you make a transcription error?
China's GDP is 10 trillion ??
http://www.econbrowser.com/archives/2005/10/china_gdp_stati.html
The US Economy, still, is simply too big, relative to the rest of the World, to be of little consequence to Aggregate Demand..
If we're talking about not aggregate demand but demand for exports, then the relevant question is how much do other countries export to the US vs. to other places.
Vietnam had an export economy that was somewhat monolithically dependent on the US from the late '90s to a few years ago. But that's changed. As of this year, the EU passed the US as the number one export destination. In seafood, after the US imposed dumping taxes, exporters reoriented towards Japan and Russia; Japan is now the top seafood export destination.
I don't know how the picture looks in the rest of the world. Just one local perspective. But one thing I will say: if your answers to the question "Is the US still the engine of the global economy?" correlates with your answer to "Is US military power serving a vital global role?" and "Does the US economy have greater income mobility?" and "Is the rest of the world freeloading off of US innovation in health care?" -- then there may be something else driving your convictions besides a rational analysis of the data.
"Is the US still the engine of the global economy?"
brooksfoe, more specifically, I was saying that the US is, at least, an engine pulling the global economy. Our position is not, as it was, moreso, in the past, that of being nearly so binary. But, we are, at this time, still so large that a downturn here will certainly affect AD at the margins, at the minimum.
Brooksfoe,
The EU has strict quotas on Chinese imported goods that do not apply for Vietnam. Might this have something to do with the rise in Vietnamese imports to the EU? I know my company specifically avoids China and goes to Vietnam and elsewhere for other projects because of EU importation rules. I'm certainly not the only one who doesn't like to see my shipments confiscated at EU customs....
That's interesting, Sam. I hadn't looked into that before; I'll check it out.