The great rebalancing has stalled.
Chinese imports barely grew in April, causing the country's trade surplus to balloon to $18.4-billion (U.S.) from $5.3-billion the previous month, the biggest increase since February, 2009, according to Capital Economics.
The latest Chinese trade data, released this week in Beijing, show the goal of getting consumers and businesses in the big emerging markets to pick up the slack from Europe and the United States remains elusive. The failure of policy makers in the Group of 20 to achieve what they call a "rotation of demand" will keep the recovery from the 2009 recession from gathering strength, keeping alive questions about its sustainability.
"Some of these economies we are relying on to do the heavy lifting are likely to disappoint for their own domestic reasons," said Ruchmir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management and author of Breakout Nations: In Pursuit of the Next Economic Miracles.
The central mission of the G20 is to rebalance the global economy.
Ahead of the financial crisis, big trade surpluses in China and corresponding deficits in the United States signalled trouble was coming. Policy makers warned these "global imbalances" could only end badly: They implied China was too reliant on trade, and U.S. growth too reliant on debt. Economists are split on whether these imbalances actually caused the financial crisis, but there is little disagreement that they set the stage for the biggest economic calamity since the Great Depression.
In 2009, the chiefs of the world's leading economies pledged to avoid policies that risked harming the global economy. G20 meetings now include a review of the economic programs of member countries. But there is no punishment for failing to live up to commitments. The G20's accountability mechanism is peer pressure.
On the surface, the effort appeared to be making a difference.
China's current account surplus narrowed to 2.8 per cent of gross domestic product in 2011, according to the International Monetary Fund's April economic outlook, a reversal that the fund said was "sharper and more persistent" than expected. The IMF predicts that China's surplus will expand to 4.3 per cent of GDP in 2017, suggesting the country is doing its share in the rebalancing of global growth.
It's a dramatic change in a short period of time. In 2007, the surplus in China's current account – a measure of the difference in outbound and inbound financial flows from trade, investment income and cash transfers – was 10.1 per cent of GDP, compared with 3.6 per cent in 2004. The U.S. current-account deficit was essentially the mirror image: 5.1 per cent of GDP in 2007, compared with an average deficit among advanced economies of 0.8 per cent.
Yet suddenly conditions in the global economy resemble the dynamic that existed before the crisis.
The U.S. trade deficit widened by 14 per cent in March, to $51.8-billion, as a 5.2-per-cent jump in imports swamped a 2.9-per-cent gain in exports, the Commerce Department reported this week. Both imports and exports were records.
For the moment, the U.S. is once again the global economy's main engine. The problem with that is the American economy isn't what it once was.
There is evidence the U.S. is at least in the early stages of dealing with its debt problem. The household savings rate is now comfortably above 3 per cent, compared with zero before the housing bust. And the federal government posted a monthly budget surplus in April, the first in more than three years.
Still, GDP is growing only at an annual rate of about 2 per cent, compared with an average annual expansion of 3.3 per cent between 1994 and 2003. The U.S. is a sounder economy. It also is a smaller one.
It appears the G20 had very little to do with the levelling of current account imbalances. The credit instead goes to the recession and subsequent lacklustre recovery.
China's response to the drop in global demand was to invest heavily at home, stoking a construction boom. That boosted demand for commodities and drew foreign investment.
The hope outside China was that authorities also would take steps to encourage greater consumer demand. But that hasn't happened. Chinese imports increased 0.3 per cent in April from a year earlier; the median estimate of 33 analysts polled by Bloomberg News was for an increase of 10.9 per cent. China's exports grew 4.9 per cent, compared with 8.9 per cent in March.
The figures call into question the strength of China's economy – and the extent to which the biggest emerging markets can substitute for demand from the U.S. and from Europe, which is in recession. Mr. Sharma believes the broad expansion of emerging markets over the past couple of decades has run its course. He predicts China will expand at an annual pace closer to 6 per cent in the years ahead, compared to the IMF's projection of growth in excess of 8 per cent through 2017.
"All the miracle economies of the past have slowed," Mr. Sharma said on a conference call hosted by Foreign Affairs magazine.