Roach on the Economy

Stephen Roach provides interesting economic analysis.
On growth in China:

The US — and especially the American consumer — remains as dominant as ever in providing the major impetus to the demand side of the global economy. But China is now emerging as a powerful force shaping the supply side of the equation. By our estimates, Chinese economic growth accounted for 17.5% of total world GDP growth in 2002, more than four times its 4% share in the global economy (at market exchange rates).
If anything, China�s global impact appears to have increased in 2003. In the first eight months of 2003, industrial output surged 16.5% above the comparable period of 2002 — well in excess of the 12.6% increase in 2002. Particularly notable has been the outward orientation of China�s vigor — not just export growth of 32.5% in the first eight months of this year but import gains of 40.6% over the same period; in fact, this year�s surge in Chinese imports looks like it will surpass the 37% increase in 2000 — heretofore the fastest annual increase of the past decade. Such an import-led growth dynamic is at the heart of China�s increasingly robust linkages to other nations in its supply chain. Of particular importance in this regard is the Chinese-led growth impetus to the Japanese economy. In the first half of this year, our estimates suggest that China�s imports accounted for 83% of Japan�s growth in goods exports — a key factor behind what appears to be yet another cyclical upturn in the long stagnant Japanese economy. Moreover, in the first half of this year, Chinese import growth also accounted for fully 92% of Taiwan�s export growth, 35% of Korea�s and even 24% of the increase in US goods exports. Courtesy of this Chinese-led impetus to global economic growth, a one-engine world is now starting to look increasingly as if it now has a two-engine growth dynamic.

On a possible slowdown in U.S. economic growth:

Notwithstanding impressive vigor in both the US and Chinese economies, there is good reason to be suspicious of its staying power. In the case of the US, a significant portion of the current growth spurt appears to have borrowed from the future. At least, that�s the verdict that can be taken from what we estimate to have been close to a 25% annualized growth in durable goods consumption in the two middle quarters of 2003 — the sharpest back-to-back quarterly gains in this category since the early 1970s. With consumer durables now having risen to what we estimate is a record 11.4% share of real GDP in 3Q03, nearly two full percentage points above the 9.5% portion prevailing at the onset of the last recession in early 2001, there�s little reason to believe that the recent surge represents a recouping of long-deferred, or pent-up, demand. Instead, it was probably more of an artificial boost reflecting the impacts of the recent tax cut, aggressive vehicles sales incentives, and the lagged effects of yet another surge of home mortgage refinancing activity. Inasmuch as durables are long-lasting items that are purchased at infrequent intervals, I would conclude that the spending burst of mid-2003 undoubtedly borrowed from gains that would have otherwise occurred in subsequent quarters.
That could be a big deal for the US growth outlook. Surging expenditures on consumer durables accounted for about 2.0 percentage points of annualized real GDP growth, alone, over the past two quarters. To the extent that such an impetus did not reflect the fundamentals of pent-up demand, a payback of like magnitude would not be surprising. Historical experience does, in fact, tell us that�s the norm after any spike in durables spending — let alone the excessive one of the past two quarters. Since 1960, there have been 16 instances of excessive growth in durable goods consumption (defined as an annualized growth contribution exceeding 1.5 percentage points of real GDP) that contributed, on average, 2.2 percentage points of annualized real GDP growth; in the two quarters that followed, the growth contribution slowed dramatically, on average, to just 0.1 percentage point. To the extent such a payback is likely after the current spending burst, it could act as a sharp depressant on overall demand growth in subsequent quarters. That development, in the context of a lingering jobless recovery, could raise serious questions about the staying power of America�s current cyclical resurgence.

Which, of course, could have political ramifications:

There�s a certain irony in such a possibility. Eager to jump-start the US economy prior to the upcoming presidential election, the Bush Administration focused on front-loaded tax cuts that were designed to have maximum impact in 2004. �Spring-loaded� was the term used by Treasury Secretary John Snow to describe the growth potential of these measures. Well, the White House may have gotten more than it bargained for. The risk, in my view, is that the policy induced stimulus occurred sooner than expected in 2003 — leaving the US economy having to face the �air-pocket� of a payback in early 2004. Needless to say, that would come during a period of maximum vulnerability insofar as the election cycle is concerned.

Bad timing for Bush, eh?
Via Brad DeLong.