Consuming passions
Aug 16th 2004 From The Economist Global Agenda
As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?
CAPITALISM is all about getting and spending. In America, where household debts amount to about 115% of disposable income, capitalism is often about spending rather more than you are getting. In recent months, however, American consumers have appeared uncharacteristically hesitant: their spending fell by 0.7% in June and their confidence ebbed last month, according to the University of Michigan's latest survey.
Aug 16th 2004 From The Economist Global Agenda
As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?
CAPITALISM is all about getting and spending. In America, where household debts amount to about 115% of disposable income, capitalism is often about spending rather more than you are getting. In recent months, however, American consumers have appeared uncharacteristically hesitant: their spending fell by 0.7% in June and their confidence ebbed last month, according to the University of Michigan's latest survey.
But as Americans acquire new inhibitions about spending, the French are shedding some of theirs. Their spending on manufactured goods surged by 4.2% in June (the biggest leap since the mid-1990s) and their saving rate dropped from 15.8% for the whole of last year to just 15.2% in the first quarter of this year. The French state, famous for intervening on behalf of its favoured companies, has recently stepped in on the side of shoppers. Nicolas Sarkozy, France’s finance minister, has arm-twisted supermarkets into cutting their prices, and part of the interest on consumer loans is now tax-deductible. In the French republic, thrift is now a vice, borrowing a virtue.
Partly as a result, French capitalism, for one brief moment, looks sprightlier than the American variety. According to figures released on Thursday August 12th, French GDP grew by an annual rate of about 3.2% in the second quarter. America grew by just 3% over the same period. France’s performance was not matched by other members of the euro area, however. In Germany, which grew by an annual 2% last quarter, household spending has been flat for a year or more; Italy is slowing; Dutch output actually shrank. The euro area as a whole grew by 2%, slower than in the first quarter. The long-awaited European recovery may have peaked before anyone really noticed it had arrived.
Japan’s recovery, of course, has been much more noteworthy. But it too may have peaked. According to figures released on Friday, the world’s second-largest economy grew at an annual rate of just 1.7% in the second quarter, after posting growth of 6.6% in the first. The yen value of Japan’s output actually fell, thanks to falling prices.
Again, Japan’s consumers may be partly to blame. Their spending, which grew by 4.2% (at an annualised pace) in the first quarter, slowed to 2.5% in the second. But the numbers are apt to mislead, says Richard Jerram of Macquarie Bank. The Japanese authorities have great difficulty stripping out the effect of deflation on their measures of output. As a result, official GDP figures probably overstate growth in the first quarter and understate it in the second. Other indicators are not much better. The household spending report, which expects households to track how much they spend on each of 21 varieties of fish, is simply too onerous and intrusive to be accurate, Mr Jerram says.
However unreliable, the numbers cannot obscure the most important question hanging over Japan’s recovery: can it survive China’s slowdown? Last year, China accounted for almost 80% of Japan’s export growth. But China is overheating—not only in economic terms but quite literally too. The China Meteorological Administration last week warned that temperatures could reach 40ºC in the southern coastal areas. Fans, air conditioners and industrial coolers are putting an intolerable burden on China’s power generators, inflicting blackouts on homes and stoppages on factories. Volkswagen has shut down plants in Shanghai twice in the past month.
Meanwhile, the inflationary dragon has returned. China’s consumer prices, which fell for much of 2002, rose by 5.3% in the year to July. The figures, released last Thursday, will revive troubling memories of a decade ago, when an unsustainable investment boom pushed inflation past 20%. In the spring, the People’s Bank of China said it would raise interest rates if inflation exceeded 5%. That limit has now been breached for two months in a row, and real interest rates, taking into account rising prices, are near zero. Nonetheless, the central bank has stayed its hand. It seems resigned to inflation rising through the third quarter, hoping it will ebb thereafter.
Should the government do more to slay inflation? Perhaps not. Higher food prices, the result of poor harvests, account for much of the inflationary pressure. According to Capital Economics, a consultancy, the best remedy for inflation may be more effective use of agricultural land, not higher interest rates.
Partly as a result, French capitalism, for one brief moment, looks sprightlier than the American variety. According to figures released on Thursday August 12th, French GDP grew by an annual rate of about 3.2% in the second quarter. America grew by just 3% over the same period. France’s performance was not matched by other members of the euro area, however. In Germany, which grew by an annual 2% last quarter, household spending has been flat for a year or more; Italy is slowing; Dutch output actually shrank. The euro area as a whole grew by 2%, slower than in the first quarter. The long-awaited European recovery may have peaked before anyone really noticed it had arrived.
Japan’s recovery, of course, has been much more noteworthy. But it too may have peaked. According to figures released on Friday, the world’s second-largest economy grew at an annual rate of just 1.7% in the second quarter, after posting growth of 6.6% in the first. The yen value of Japan’s output actually fell, thanks to falling prices.
Again, Japan’s consumers may be partly to blame. Their spending, which grew by 4.2% (at an annualised pace) in the first quarter, slowed to 2.5% in the second. But the numbers are apt to mislead, says Richard Jerram of Macquarie Bank. The Japanese authorities have great difficulty stripping out the effect of deflation on their measures of output. As a result, official GDP figures probably overstate growth in the first quarter and understate it in the second. Other indicators are not much better. The household spending report, which expects households to track how much they spend on each of 21 varieties of fish, is simply too onerous and intrusive to be accurate, Mr Jerram says.
However unreliable, the numbers cannot obscure the most important question hanging over Japan’s recovery: can it survive China’s slowdown? Last year, China accounted for almost 80% of Japan’s export growth. But China is overheating—not only in economic terms but quite literally too. The China Meteorological Administration last week warned that temperatures could reach 40ºC in the southern coastal areas. Fans, air conditioners and industrial coolers are putting an intolerable burden on China’s power generators, inflicting blackouts on homes and stoppages on factories. Volkswagen has shut down plants in Shanghai twice in the past month.
Meanwhile, the inflationary dragon has returned. China’s consumer prices, which fell for much of 2002, rose by 5.3% in the year to July. The figures, released last Thursday, will revive troubling memories of a decade ago, when an unsustainable investment boom pushed inflation past 20%. In the spring, the People’s Bank of China said it would raise interest rates if inflation exceeded 5%. That limit has now been breached for two months in a row, and real interest rates, taking into account rising prices, are near zero. Nonetheless, the central bank has stayed its hand. It seems resigned to inflation rising through the third quarter, hoping it will ebb thereafter.
Should the government do more to slay inflation? Perhaps not. Higher food prices, the result of poor harvests, account for much of the inflationary pressure. According to Capital Economics, a consultancy, the best remedy for inflation may be more effective use of agricultural land, not higher interest rates.
For most of its short life, Chinese capitalism has been all about getting and investing. The Chinese invested over $660 billion in fixed assets last year, dotting the country with industrial parks, steel mills and office towers. Qu Hongbin, an economist at HSBC, reckons that about $200 billion-worth of this investment is surplus to requirements. Thus the task for the Chinese authorities is not to restrain the economy so much as to rebalance it, away from investment towards consumption.
To a certain extent, this shift is already taking place. Investment in fixed assets is slowing, while retail sales have been strong. As J.P. Morgan reports, the disposable income of city-dwellers is accelerating, and income per head in rural China is growing at its fastest pace for seven years.
Still, the authorities may be asking rather a lot of the Chinese consumer. Investment accounted for well over 40% of GDP last year. If such an important yet volatile component of Chinese demand were to collapse, could consumption ever compensate? Even if it could, Mr Qu argues, this would be cold comfort for Japan or for any other economy dependent on exports to the Middle Kingdom. What China buys from the rest of the world, after all, are commodities and machinery, not consumer trifles. If its growth were to shift from investment to consumption, its demand for the rest of the world’s products would slump, even if its growth did not slow that much.
The Chinese invest too much, Americans save too little and the Europeans, especially the Germans, could stand to spend more. The fate of the world economy in the year to come depends a lot on how these imbalances are resolved.
To a certain extent, this shift is already taking place. Investment in fixed assets is slowing, while retail sales have been strong. As J.P. Morgan reports, the disposable income of city-dwellers is accelerating, and income per head in rural China is growing at its fastest pace for seven years.
Still, the authorities may be asking rather a lot of the Chinese consumer. Investment accounted for well over 40% of GDP last year. If such an important yet volatile component of Chinese demand were to collapse, could consumption ever compensate? Even if it could, Mr Qu argues, this would be cold comfort for Japan or for any other economy dependent on exports to the Middle Kingdom. What China buys from the rest of the world, after all, are commodities and machinery, not consumer trifles. If its growth were to shift from investment to consumption, its demand for the rest of the world’s products would slump, even if its growth did not slow that much.
The Chinese invest too much, Americans save too little and the Europeans, especially the Germans, could stand to spend more. The fate of the world economy in the year to come depends a lot on how these imbalances are resolved.
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