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Foreign Consumers Deemed Critical to Pulling World Out of Recession

December 17th, 2008 |

What’s one key to the global economy’s recovery, and by extension, the U.S. economy’s recovery?

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Well, it’s not likely to be an engine of growth of the past, namely, the U.S. consumer. Several regional growth engines are needed.

To be sure, the U.S. consumer will play a role: a $14 trillion economy — still, the world’s largest — remains an influential contestant in the GDP arena, but if the global economy hopes to achieve a balanced, sustainable growth track, consumption by consumers in the world’s other major economies have to play a larger role, so says economist Peter Dawson.

Dawson’s analysis assumes that the U.S. consumer will return — not to home equity loan-driven, frenzied, unsustainable consumption of this decade, but to a moderate growth track, after real median incomes start to rise after the U.S. economy starts to recover. The above is mentioned as a backdrop because some economic models assume severely-challenged U.S. consumption for several years; Dawson’s model is not one.

Still, even a moderate-growth U.S. consumer spending model does not invalidate the need for structural changes in the global economy.

“Citizens in China, India, Brazil / Latin America, Russia, and Japan have to consumer more,” Dawson said. “If they continue to depress demand through currency intervention or other mercantilist policies, it clouds the whole global recovery picture and timetable,” Dawson said. Dawson is optimistic about consumption growth in Russia, India, Brazil and the broader Latin American region. However, China and Japan remain problematic, for different reasons, he said.

“China has to allow foreign goods to circulate more freely in China, and it has to move away from any effort to devalue its currency [the yuan], as it will simply contract demand more by making foreign goods more expensive,” Dawson said.

“Japan’s problem is part demographic and part habit. Its aging population means its younger citizens will have to pick up the slack, in order for Japan to contribute to global consumption, on a net basis, but saving tendencies work against this,” Dawson said.

In sum, in the post global recession world, rising consumption in emerging markets must take place for sustainable growth to occur, Dawson said. “The economies and middle classes of Russia, India, Brazil are large enough to create more demand, and combined with developed world demand, this should be enough to get the global economy on a sustainable growth track,” Dawson said. “With those growth engines in place, consumer demand from China and Japan would be a bonus.”

Economic Analysis: The era of emerging markets pumping out goods, then counting on U.S. consumers to drive global growth is over. As economist Dawson noted, emerging market demand will be needed to both get the economy out of recession and on a sustainable growth track characterized by multiple engines of growth, not just one growth engine in United States.