Deborah Baic/The Globe and Mail
Nobody said the rebalancing of the global economy - the crucial but tectonic shift away from voracious U.S. consumption and toward more American-style consumer spending in China - was going to be a cakewalk.
The world economy still seems to be counting on U.S. consumer spending to slough off the recession, even though that could be a recipe for a harder fall next time. But policy makers haven't found a way to reconcile their short-term objective of a return to growth with a longer-term desire to reorient global trade patterns.
Stock markets seem to be clinging to any sign that consumers, primarily in the United States, the only economy big enough and spendthrift enough to make a meaningful difference, are coming out of hibernation.
One sign that they're not, such as Friday's disappointing consumer confidence data, and all bets are off.
But a recovery that hangs too much on the American consumer carries its own risks: Such a rebound would simply recreate the conditions that led to the economic crisis in the first place - bloated household debt and blimp-sized government deficits.
To get out of this trap, the United States must ultimately end its addiction to imports and easy credit, and learn how sell more of its goods abroad. China, Japan and Germany, meanwhile, have to ease their dependence on exports and get their citizens to "Buy American" more.
While global rebalancing implies weaning the world economy off U.S.-led consumption, it seems that the only quick way out of the global recession involves providing American consumers with a series of quick fixes - the latest being President Barack Obama's cash-for-clunkers program aimed at fuelling auto sales.
"In the short term, it is very difficult to see a way for the [Chinese and Japanese economies]to sustain their recoveries if you don't have exports to the U.S. beefing up. This leaves a major global tension," said Eswar Prasad, a professor of trade policy at Cornell University and senior fellow at the Washington-based Brookings Institution.
A massive increase in lending by state-owned banks and government stimulus spending in China was aimed in part at getting consumers there to spend more. Instead, it may have only exacerbated the country's need to export.
The cheap and easy credit made available to large state-owned firms in recent months means Chinese industry is becoming more and more capital intensive. All this investment has pushed gross domestic product growth upward to its current heady annual rate of 8 per cent. What it hasn't done is create a lot of jobs.
"This is where the tension created by the Chinese growth model comes into play," explained Mr. Prasad. "If your growth model is generating very good GDP growth, but not employment growth, then household income growth is not able to keep up with the amount of output your economy is producing, so you become much more reliant on exports."
What bank lending hasn't gone into increasing China's productive capacity has, along with foreign investment, gone into the stock market. Fears of a stock bubble recently led Chinese state banks to tighten credit and the government to clamp down on the flow of foreign capital into the country. Figures showing that foreign direct investment in China plunged 35.7 per cent in July, in part fuelled yesterday's 5.8-per-cent slide on the Shanghai stock exchange.
What looks like bad news for Chinese investors today, however, may in fact be salutary for the world economy tomorrow. For global rebalancing to occur, Chinese businesses need to invest more of their profits abroad instead of increasing their productive capacity at home. For instance, rather than seeking to export cars to North America, as many appear to be gearing up to do, Chinese auto makers should follow the lead of their Japanese and South Korean counterparts and invest in factories on this continent.
"If you build your business in the U.S., you're no longer exporting to the U.S. and ... you help bring some equilibrium," TD Bank senior economist Richard Kelly noted. "It's one of the long-run changes we need to see if we're going to see a stable expansion in the global economy over the next 10 to 20 years."
No one seems to have figured out just when or how bankrolling the U.S. consumer should stop and global rebalancing should kick in.
To encourage Chinese consumers to spend more and save less, the government needs to increase their confidence in the future by enhancing the country's rudimentary social safety net. Without adequate health or unemployment benefits, the Chinese now plow any extra income they get into "precautionary savings" in case they get sick or lose their job, Prof. Prasad noted.
China's recent stimulus package included coupons for consumers to buy big-ticket items, such as televisions and refrigerators. But it was far too modest and temporary to reorient Chinese consumption pattern on a sustained basis.
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OUT OF RECESSION
Japan: GDP rises on exports to China
Japan's economy returned to growth in the second quarter, with the gross domestic product up 0.9 per cent from the previous quarter. This is an improvement from the first-quarter contraction of 3.1 per cent.
Germany: growth, after 4 quarters
Germany reported on Thursday that economy grew by 0.3 per cent in the second quarter, after four quarters of contraction.
France: A return to growth
France also weighed in on Thursday with a report that its second-quarter gross domestic product had increased by 0.3 per cent. This also came on the heels of four quarters of contraction.
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IN RECOVERY
Canada: growth expected to resume
Bank of Canada Governor Mark Carney said on July 23 that the recession is over in Canada, with growth expected to resume in the third quarter.
"We are on track for the recovery both in Canada and globally," Mr. Carney said at a news conference. "But it's early days. It's a long road."
Canada will report its second-quarter GDP numbers later this month.
The Canadian economy contracted by 5.4 per cent annualized in the first quarter.
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STILL IN RECESSION
United States: 'levelling out'
Although Fed officials are sounding hopeful, the U.S. isn't out of the woods yet. The Fed's policy-setting committee said Aug. 12 that the recession appears to be "levelling out."
Britain: the downturn lingers
Bank of England chief Mervyn King said Britain is still mired in recession - the economy contracted by 0.8 per cent in the second quarter. Still, that marked an improvement over the first-quarter contraction of 2.4 per cent.
Italy: still lagging
GDP fell by 0.5 per cent in the second quarter. This was, however, better than the 2.7-per-cent fall reported in the first quarter.
Virginia Galt, with files from Reuters and CP
Konrad Yakabuski