LONDON – Not long ago, before the financial crisis and the global recession it triggered, economists referred to Americans as the consumers of last resort. When the U.S. grew at a healthy pace, its citizens were buyers, fueling demand for the goods China and other nations produced. They kept the world economy humming.
It may not work that way anymore, Bloomberg Markets magazine will report in its January issue. A rebounding U.S. is giving less support to global growth than in the past. Homegrown demand and production are more important drivers of the worlds biggest economy than they were a decade ago.
The smallest U.S. current-account deficit since 1999 shows the trend, and the discovery of new domestic sources of oil and gas reinforces it. Exploration and production are adding to growth, and the country is spending less on imported energy. Cheaper fuel and raw materials are boosting manufacturing as well, making the U.S. more of a competitor to emerging-markets nations and less a reliable consumer of their goods.
Global growth is slowly becoming more of a zero-sum game, says Manoj Pradhan, emerging-markets economist at Morgan Stanley in London and a former International Monetary Fund official. U.S. growth is not reverting to the pre-crisis model, which created lift for everyone else.
A 1 percentage point pickup in U.S. economic growth typically boosted expansion elsewhere by 0.4 percentage point, according to Gustavo Reis, senior international economist at Bank of America. Now, he calculates, the benefit to other countries is moving toward 0.3 percentage point, adding $48 billion to the rest of the world economy instead of $64 billion.
A stronger U.S. economy is an important part of our expectation for healthier global growth, but the oomph to the rest of the world will probably be somewhat less than in the recent past, Reis says.
The U.S. is likely to grow 2.6 percent in 2014 and 3 percent in 2015, according to the median forecast of economists surveyed by Bloomberg News, up from an estimated 1.7 percent in 2013. If that isnt going to ignite growth elsewhere in the world, investors will probably favor the dollar and developed-nation stocks more than emerging-markets currencies and assets.
Thats what has happened in 2013. The South African rand lost 17 percent against the dollar year-to-date, as of Nov. 27, while the Brazilian real dropped 11 percent. The Standard & Poors 500 Index of large U.S. companies returned 29 percent through Nov. 27 compared with a loss of 2.2 percent for the MSCI Emerging Markets Index of 818 developing-world stocks.
Strengthening in the U.S. economy and weakening in China, India, Brazil and elsewhere reverses the trend that had shaped global growth since 2008. Emerging markets fared better than the U.S. and Europe during the global recession that followed the credit market freeze and the bankruptcy of Lehman Brothers. Now, their luster is dimming.
As of October, the IMF was estimating the worlds developing economies would grow by 4.5 percent in 2013, the slowest pace since 2009 and well below their average for the past decade. As recently as July, the IMF was predicting 5 percent growth for the group in 2013.
A particular threat to emerging markets – and another unhelpful result of the rebound in the U.S. – is the pending withdrawal of Federal Reserve monetary stimulus. The first move likely will be a tapering of the $85 billion in monthly asset purchases that have helped keep interest rates low. That will start in March, according to the median forecast of economists surveyed by Bloomberg News in early November. More-stingy Fed policy may deprive emerging markets of capital and raise their borrowing costs.
Are we worried? Of course, Reserve Bank of India Governor Raghuram Rajan said at the IMFs annual meeting in Washington in October. Everyone is worried about a global storm.
A dress rehearsal for what might happen when the Fed pulls back its support occurred in the summer, when even the suggestion that tapering would begin soon sparked a selloff of bonds and currencies from Brazil to India. There is transition tension, South Korean Finance Minister Hyun Oh Seok said in an interview with Bloomberg News, also during the IMF gathering. He urged the Fed to move cautiously.
At their September meeting, Fed policy-makers surprised economists and investors by keeping the asset purchases at $85 billion a month. It will now probably fall to Janet Yellen, President Barack Obamas nominee to succeed Ben Bernanke as chairman when his term expires on Jan. 31, to negotiate the Feds exit from its extraordinary monetary support.
Investing in emerging markets across the board, rather than picking specific countries, often was a winning strategy in the past decade. Now, investors may need to be more discerning. Rajan, a University of Chicago professor before taking on policy posts in India, said investors typically dont pay enough attention to the specific circumstances of individual economies during periods of stress. The problem emerging markets have at times like this is getting the story, the truth, about fundamentals out, he said.
Michael Shaoul, chairman of Marketfield Asset Management in New York, says some emerging-markets economies are going to see further capital outflows in coming months. Investors are separating good countries from bad, he says. I dont think the bear market in emerging markets has bottomed, Shaoul says. His firm, which oversees about $17 billion, is betting against equities and bonds of Brazil and India, among others.
Private capital flows to emerging markets will decline to $1 trillion in 2014 from $1.2 trillion in 2012, according to an October estimate by the Institute of International Finance, an industry group based in Washington that represents global banks.
Trade data help explain the shift thats curtailing the effect of the U.S. rebound on global growth. The U.S. current-account deficit, which reflects the excess of imports over exports, has narrowed. It was 2.5 percent of GDP in the second quarter compared with almost 6 percent in the third quarter of 2006. The last time it was as low as now was in 1999.