The U.S. Is Now the Least Ugly Economy

Among the world's major economies, America's is "the least ugly," as Adam Posen, head of the Peterson Institute for International Economics, puts it. So it is. The American economy is plodding along at about a 2% annual growth rate, which is much slower than most past periods, but compared with most other economies, looks stellar.

Peterson economist Paolo Mauro projects that the euro area (the 19 countries using the euro) will grow only 1.5% in 2016. Japan's projected growth in 2016 is a mere 0.4%. By the numbers, China still shines. But its growth, 10% only a few years ago, has decelerated rapidly. It's projected at 6.4% in 2016 and could be much lower - if the economy experiences a "hard landing."

The Peterson projections are a twice-a-year ritual, timed to precede the meetings of the International Monetary Fund (IMF) and World Bank. The official IMF forecasts, which came out a day later and are similar, conveyed the same central message: Mainstream economists seem resigned to prolonged economic sluggishness.

Here's what that means. From 1997 to 2006, the world economy grew at an annual rate of about 4%, with "emerging market" countries (China, Brazil, India and the like) outpacing advanced nations (the United States, Europe, Japan and some others). Now the Peterson economists project world growth at 3% annually. "Emerging market" economies still grow faster, but the gap has narrowed.

The difference between 3% and 4% global growth may not seem a big deal, but it is.

At present exchange rates, the output of the world economy is about $75 trillion. An extra percentage point of growth is $750 billion worth of added goods and services. The gap between 3% and 4% expands every year. After a decade, it would exceed $7.5 trillion in inflation-adjusted dollars.

The Peterson economists seem fairly confident that the more modest growth targets can be met. The U.S. economy, argues Posen, still benefits from a recovery in housing construction and sales. True, he worries about a recent slowdown in household formations - mainly young couples delaying establishing their own living arrangements. This could subvert housing's rebound, but Posen thinks the dip is temporary.

The biggest threat to the global economy is a "hard landing" by China: a collapse of growth which, given China's role as a trading nation, would drag down countries that supply it with raw materials and semi-manufactured goods. Both Mauro and economist Nicholas Lardy, a China specialist at Peterson, discount the danger. China, they argue, is making a successful, if bumpy, transition from an industrial to a service economy.

But even this comes with a caveat. A service economy, says Mauro, requires fewer imports than an industrial economy. So China's main suppliers must suffer some collateral damage. The most vulnerable nations include Australia, which in 2014 sent 34% of its exports to China, South Korea (26%), Japan and Brazil (18%). By contrast, U.S. exports to China represent only 8% of the American total.

That may make Americans feel insulated from China's troubles. This is an illusion. If China weakens the greater world recovery, the United States will suffer through weaker overall demand for exports. Growth is so slow, the IMF warns, that one or two negative surprises could trigger a synchronized slump.

Americans may also feel comforted to think that their economy is the strongest in a sickly crowd. But this, too, misses the point, which is political as much as economic. Modern democracies rely on strong economic growth to satisfy popular demands for both more government services and higher personal incomes. Slower growth now jeopardizes this arrangement.

Everywhere - the United States, Europe, Asia - the politics of disappointment is driven by a gap between what people expect and what they're getting.