The Ideal Course of Economic Recovery

The global recession is coming to an end. China grew at 7.9% in the second quarter and expects the pace to pick up to more than 8% in the third quarter. Singapore registered a 20.4% growth rate (annualized) in the second quarter. Hong Kong’s (annualized) growth rate was somewhat less impressive, but still made 13.9%. Japan's real gross domestic product grew at a pace of 3.7% per year. Even in Europe, several economies are showing signs of recovery or have already registered positive growth. The largest two economies, Germany and France, each grew at an annual rate of 1.2%. Even though the UK economy still shrank at an annual rate of 3.2% in the second quarter, it is actually faring even better than most of the other European economies, as it had not declined nearly as much, and as its unemployment rate is much lower too, at 7.8% in the April-June period. More important, the leading indicators are pointing in the right direction, with the manufacturing PMI exceeding 50 for the first time in months, standing at 50.8 in July. New orders were rising for the first time since March 2008, and they were broad-based. The PMI for services was even stronger, hitting 53.2 in July, up from 51.6 in the previous month, suggesting positive growth in the immediate future.

But many skeptics who will not accept a recovery in the United States point to rising unemployment and sagging domestic consumption. They ask: if people are not buying and are still losing their jobs, where does the growth come from?

The answer is overseas. And an exports-led recovery is exactly the ideal course of the recovery for the United States. The most recent Philadelphia Fed Business Outlook Survey's future indicators showed notable improvement in August. The future general activity index increased from 18.0 to 27.6. The indexes for future new orders and shipments also rose 15 and 11 points respectively. The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -7.5 in July to +4.2, which is the highest reading of the index since November 2007.

When the exports-led recovery gathers momentum, unemployment will start falling, and with more people employed, domestic consumption will pick up. There is a case to be made that the US needs a higher savings rate, as I have argued before. Recent developments are pointing exactly to this direction. So do not be disheartened if domestic consumption does not immediately rise. As long as US exports continue to grow, and as long as the housing market continues to stabilize, gains in employment and revival of consumption are just a matter of time—and I would say: months.

An exports-led recovery in the United States is the most ideal, as it is more sustainable, given the excessive indebtedness of the country. Americans need to mend its ways of overspending, while households in Asia and elsewhere need to open their purse more. People have been talking about the global imbalances for a long time. This is the time to address it, and the signs observed so far are good.

Comments

[siew_wah:]

Prof Lok Sang Ho's views on the US economy are taken seriously by readers (myself included) because more often than not, they turn out to be true. With optimism, more money would be channeled towards investments in stocks and businesses which would help turn around the world economy.

Aug 26 08:49 AM