The Year of the Pig

Maybe the world doesn't need the American consumer quite as much as the American consumer thinks. Having become accustomed to a world order where shoppers in the U.S. buy imported goods that they generally don't need using money that they certainly don't have, the rise of the consumer class in China may come as a rude awakening to borrowers and spenders around the world.

In Switching Engines($), from the current issue of The Economist, it is clear that something has changed. With the U.S. sneezing up a storm over the last few months, no other country seems to be catching a cold. At least not yet.

IN RECENT years the American economic locomotive has pulled along the rest of the world, while frugal firms and households elsewhere have preferred to save not spend. So, at least, goes the popular wisdom. Signs that America's boom may be fading have therefore caused concern around the globe. Typically in the past, when America's economy has weakened, the rest of the world soon flagged. But this time—so far, anyway—looks different. The rest of the globe has speeded up even as the American engine has lost steam.

The figures are striking. The annual rate of growth of America's real domestic demand dropped from 4.4% in 2004 to only 1.9% in the second half of last year. The main culprit was the sickly housing market: although consumer spending has held up better than expected, the construction of homes has collapsed. So is the rest of the world also wobbling? On the contrary, many other economies have put on a spurt.
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These are early days, so don't get carried away. The real test of the rest of the world's stamina will come over the next year, as the negative wealth effects of falling home prices start to weigh on American consumer spending. But also take some confidence from the evidence thus far: the world economy may be able to cope without American shoppers.

Never count out the American consumer. Isn't that what they always say? Many a punter have been disappointed after placing bets on a slowdown in big screen TV sales to U.S. homeowners with big rooms to fill and big home equity to spend.

Is this the year that home equity in the U.S. fails to deliver? Maybe.

Is this the year that consumers in Asia start to deliver? Maybe

February 18th marked the Chinese New Year - the year of the pig. In another piece from The Economist, the question is asked Can Pigs Fly?

People often put the blame on China's tight-fisted consumers, who save too much and spend too little. Official figures appear to confirm their guilt, showing that household consumption has fallen from 46% of GDP in 2000 to only 37% last year.

But many economists reckon China's consumption is much stronger than the official tally suggests. If measured correctly, it may be up to ten percentage points larger as a share of GDP (and investment lower by the same amount).

Other indicators certainly suggest that consumers are having a ball. Car sales have risen by 30% over the past year; sales of mobile phones and household electronics are up by 20-40%. Retail sales as a whole grew by 12.3% in real terms in the year to the fourth quarter, well ahead of GDP growth.
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What does this mean for China's critics? America's Treasury is urging its Chinese counterparts, in their Zhongnanhai headquarters, to stoke household spending. But if firms, not consumers, are to blame for China's trade surplus, such policy advice will fail. China still needs to liberalise consumer finance and bolster social-safety nets, but these are slow-burn prescriptions that will not shrink China's trade surplus in the short term.

The codewords 'stoke household spending' and 'liberalize consumer finance' means that Citibank and other friendly U.S. banking concerns are desirous of putting a credit card in the pocket of every Chinese worker to really get the party going (or, as a more modest start, to at least stop them from saving so much.)

The most recent report on consumer spending from China Daily suggests that maybe the party is already going strong.

Holiday retail sales up 15%

The retail sales of consumer goods in China rose 15 percent year-on-year to 220 billion yuan (28.2 billion U.S. dollars) during the week-long Spring Festival holiday, said sources with the Ministry of Commerce on Saturday.
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Meanwhile, high-end household electric appliances and digital products became hot sellers in major cities.

Sales of flat screen TV sets, including liquid crystal display (LCD) sets and plasma screen sets, accounted for 90 percent of the total sales of color TV sets in Beijing, while the sales of high-end mobile phones soared 40 percent in GOME retail stores in Chongqing.

Motorcycles priced between 3,000 yuan and 5,000 yuan sold well in rural areas of central Hubei Province and eastern Jiangsu Province as more and more farmers rode motorcycles to make New Year visits to relatives and friends.

They've got a long way to go to rack up numbers like their U.S. counterparts where annual retail sales are in the trillions - perhaps many, many years of double-digit growth will do the trick.

Not surprisingly, the Chinese have taken a liking to gold bullion, according to this report buying one-gram "lucky balls" in huge quantities in the capital city of Beijing.

With vaults full of the yellow metal here in the U.S., perhaps there is hope for squaring the trade deficit.