Boom Times Are Back, Outside the U.S.
It is becoming increasingly clear that the story of the global economy is a tale of two worlds. In one, there is only gloom and doom, and in the other there is light and hope. In the traditional bastions of wealth and power—America, Europe and Japan—it is difficult to find much good news. But there is a new world out there—China, India, Indonesia, Brazil—in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future. This divergence, between the once rich and the once poor, might mark a turn in history.
Over the past six months, much conventional wisdom about the economy has been discredited. The old experts who spoke with confidence about unending global growth—the boomsters—have been debunked. But the new pundits of pessimism—the doomsters—have demonstrated a similar hubris, ignoring any evidence that might complicate their story. Six months ago, stock markets around the world swooned in unison as the American financial system seemed on the verge of collapse. This led many to conclude that the emerging economies of Asia and Latin America had been growing only because of their exports to America and Europe; that they obviously had no independent strengths of their own and would in all likelihood collapse faster and more furiously than the sophisticated economies of the West. After all, these were Third World countries.
But a funny thing happened on the way to a global depression. Once the panic that seized all global markets abated—because it became clear the world was not going to end—there began a fascinating and disparate recovery. The American stock market, after six plummeting months, has rebounded, so that the S&P 500 is roughly where it started the year, as is the London FTSE. Japanese stocks have fared better, up nearly 7 percent.
Around the globe, though, markets are humming. China's Shanghai index is up 45 percent, India's Sensex is up 44 percent, Brazil's Bovespa is up 38 percent and the Indonesia index is up 32 percent. Now, stock markets don't tell the whole story, but the reason many of these are rising is that the underlying economies of most of these countries are still registering significant growth. The evidence abounds. In April, India's car sales were 4.2 percent higher than they were a year prior. Retail sales rose 15 percent in China in the first quarter of 2009. China is likely to grow at 7 or 8 percent this year, India at 6 percent and Indonesia at 4 percent. These numbers are not just robust but astonishing when you line them up against those in the developed world. The U.S. economy contracted at an annual rate of 6.1 percent last quarter, Europe by 9.6 percent and Japan by a frightening 15 percent, something that truly does begin to rival the 1930s.
Compare the two worlds. On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP—a level last seen during World War II. With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while. And it's probably more dynamic than Europe or Japan.
Meanwhile, emerging-market banks are largely healthy and profitable. (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!) The governments are in good fiscal shape. China's strengths are well known—$2 trillion in reserves, a budget deficit that is less than 3 percent of GDP—but consider Brazil, which is now posting a current account surplus. Or Indonesia, which has reduced its debt from 100 percent of GDP nine years ago to 30 percent today. And unlike in the West—where governments have run out of ammunition and are now praying that their medicine will work—these countries still have options. Only a year ago, their chief concern was an overheated economy and inflation. Brazil has cut its interest rate substantially, but only to 10.25 percent, which means it can drop it further if things deteriorate even more.
The mood in many of these countries remains surprisingly upbeat. Their currencies are appreciating against the dollar because the markets see them as having better fiscal discipline as well as better long-term growth prospects than the United States. Their bonds are rising. This combination of indicators, all pointing in the same direction, is unprecedented.
The United States remains the richest and most powerful country in the world. Its military spans the globe. But from the Spanish Empire of the 16th century to the British Empire in the 20th century, great global powers have always found that their fortunes begin to turn when they get overburdened with debt and stuck in a path of slow growth. These are early warnings. Unless the United States gets its act together, and fast, the ground will continue to shift beneath its feet, slowly but surely.