The United States’ economy has returned to growth after a year of declines. The 3.5 per cent expansion of a quarter of the world’s output in July-September of this year signals the US economy is off its deepest point, but it also begs the question: will the recovery sustain? On current indications, no. A cash-for-clunkers scheme to spur automobile sales and a tax credit for home-owners that caused the growth spike are time-bound; the first ended in August, the second closes this month. Excluding automobiles, the US economy grew 1.9 per cent last quarter, and the rebound in construction is reckoned to have added half a percentage point to growth. The Obama administration’s fiscal intervention has worked, but consumer spending, which accounts for 70 per cent of demand in the US, does not show signs of reviving.
In fact, Americans cut spending by 0.5 per cent in September after a 1.4 per cent rise in August, signaling consumers are unlikely to make a full-fledged contribution to the recovery without handouts. Blame it on a jobless recovery. Profits at about 85 per cent of the companies in the Standard & Poor’s 500 Index beat expectations, according to Bloomberg. Yet the unemployment rate is nudging 10 per cent, highest in a generation. Lean factory stockpiles will drive US growth in coming quarters; the output gains are not expected to ramp up hiring. Jobs must be created and household savings repaired before the US consumer starts spending again. Neither precondition looks imminent.
The US is in for protracted adjustments and the rest of the world will have to adapt to this new reality of the reluctant American spender. The International Monetary Fund (IMF) estimates potential growth in the US will remain below 2 per cent for a considerable time on permanent output losses relative to pre-crisis trends. A key challenge facing Asia will be to devise a way to return to sustained, rapid growth in a new global environment of softer G-7 demand. The structural shift requires wider social security to discourage precautionary Asian savings, more robust financial markets to lessen the dependence on foreign capital and flexible exchange rates to restore the global trade balance. “In this ‘new world,’ Asia’s longer-term growth prospects may be determined by its ability to recalibrate the drivers of growth to allow domestic sources to play a more dynamic role,” says the IMF.