High Streets on two different sides of the world defied the gloom in May. In the US, that famous retail analyst Mark Twain said, “Talk of the US consumer’s death is greatly exaggerated,” while in China, retail sales rose by a stunning 21.6 per cent.
It is sort of good news. It is good to know the US consumer is such a robust beast, and it is good to see China consuming goods and services. For much of this decade the global economy has had this curious duality. You have got massive spending in countries like the US and UK, and huge savings in other parts of the world.
In fact some economists, Alan Greenspan, for example, or here in Blighty, Roger Bootle, have often talked about the high savings rate in countries such as China as the real force that is influencing economic events.
High savings had to go somewhere, and as a result Western money markets were flooded, this created the credit boom – the unsustainable credit boom.
It has been obvious for some time that we need to spend less and save more in the UK and US, but at the same time there was a question mark over whether the rest of the world could afford for that to happen.
For some time it has been clear we have needed to see China, Japan, and Germany take up the spending baton. If that could happen, then this decoupling thing could become reality – the world would no longer be quite so reliant on the US. No longer would a slight sniff by Uncle Sam lead to a nasty cold elsewhere. If the baton really could be passed on in this way, then the credit crunch of 2008 will go down in history as a good thing, the point when the real problems besetting the economy were grappled with.
But here is something a tad more worrying. In China in May, sales of automobiles rose 32 per cent.
Sorry, did you catch that? – 32 per cent.
The price of oil is up there beyond the stratosphere, in the US and UK we are reining in our expenditure on cars, and opting for cheaper, fuel-efficient vehicles. But in China, sales rose 32 per cent.
Oil will fall in price if consumers curtail their spending – look to make cut backs, look for more efficient alternatives – yet in China, and hold your breath for this statistic, auto sales rose 32 per cent.
In the US, the jump in retail sales was more modest, but still quite eye-catching. Sales in May were up by 1 per cent on the month before. April too saw a 0.4 per cent rise on the previous month. Now a 1 per cent jump in just one month is quite extraordinary, and certainly not the kind of thing you would normally expect from an economy on the brink of recession.
But remember this – remember, George Dubya kindly writing out all those cheques earlier in the year. He was at it all night – licking down envelopes, Henry Paulson licking down stamps, and Dick Cheney ran them over to the letterbox. In all, 117 million households were earmarked for the cheques, couples were down for $1,200, and individuals $600. Come to think of it, with all those cheques, they probably got George Dubya’s father to come and help too
So, what would you do if one morning sitting on the doorstep there was a cheque for $1,200? Would you use it to pay off a credit card bill? Would you stick it in a savings account? After all, with this nasty credit crunch you never know what is going to happen; or would you say hang it all – let’s spend it.
Economists had expected US consumers to be more frugal. In any case, they said, the tax credit would just be enough to compensate US citizens for the soaring price of gas. So they decided it wouldn’t have an effect – well, they were wrong.
It is a shame the UK government, so strapped for cash, doesn’t have the option of creating that trick.
Mind you, in the US one assumes this rate of growth won’t be maintained – unlike in China – who knows how long it will continue?
With recent evidence suggesting Chinese inflation might be ebbing, it seems there is just a chance China might come to the rescue after all.
Actually, contrary to the theory of decoupling, the world is more connected today than ever before. China’s main supplier is Japan – followed by South Korea and then Taiwan. The US is fourth. So booming Chinese consumption will help Japan more than anyone. But then, 20 per cent of Japan’s imports are from the US, 12.3 per cent of South Korea’s imports are from the US.
But the surge in auto sales does pose a worry. As you know, gas is subsidised heavily in China – and so far the evidence is that the government can afford the subsidy.
In the long-term, demand should fall if price rises. The price of oil is at now at levels that many people just can’t afford. This is why we have argued it will fall back – eventually. But as long as demand in China continues to soar, and as long as subsidies mean Chinese consumers don’t feel the full price – this effect will be muted.
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