Weakest link in global growth this year? You, the American consumer

Saturday, February 25, 2006 at 04:18 PM

Once a year the people who own and run everything hold a little shindig somewhere, present lots of speakers on lots of economic topics, then present summaries to the peons of the world (and the press, if you think that's different).

This year's World Economic Forum (WEF) annual meeting was in in Davos, Switzerland, where Stephen Roach, Chief Economist for Morgan Stanley, called the American Consumer the "weakest link" in 2006's global growth prospects.  There were plenty of other statements and opinions, too.

The more complete description of Roach's comments, in the WEF's Session Summary for the Global Economy session:

But fairy tales are no basis for sustainable economic growth, and the kind of complacency prevalent among investors today is setting markets up for a shock, warned Stephen S. Roach, Chief Economist, Morgan Stanley, USA. Asia's central bankers cannot go on financing the profligacy of the US consumer, supporting the dollar despite a yawning US current account deficit. The weakest link in global growth this year, therefore, is the American consumer, Roach said. Signs are emerging that the US housing boom is finally fading, which will eliminate the most significant source of the "funny money"that has enabled the American public to keep spending beyond its means, he said. Indeed, there are signs that consumers are beginning to cut back after hurricane Katrina sent prices for fuel soaring. When and if this downturn materializes, the developing economies of Asia and elsewhere could be in trouble: having failed to develop sufficient domestic demand, they remain dependent for growth on sales to the American consumer. "I think this is the year to watch out very carefully for the end of the great American spending binge,"Roach said.

But not to worry, most world economic folks think Mr. Roach is a naysaying pessimist.  Which is exactly what they called people who warned of a stock market crash in the late 1920s, just before it crashed.

Other joyous comments that should make you think twice about taking out another credit card, or mortgage, or expensive date.  The Finding Balance in the Global Economy session produced several gems to warm the hearts of those of us with shaky economic cushions.

a.  There was this from session chair Martin Wolf, of Financial Times:

While the global economy is growing very strongly, it could be described as"astonishingly unbalanced," session chair Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times, United Kingdom, said to set the context. He cited low savings and high consumption in the US, its large current account, and budget deficits as indications of the imbalances."Capital flows to the richest country, the country that can use it best," Wolf remarked, noting that developing economies are capital exporters. How long can this last? Who is responsible? Is this just a natural part of globalization?

b. There was this, form Lawrence H. Summers, President (at the time) of Harvard University:

The US is experiencing a period of substantial import-led growth, with domestic demand exceeding production. The mirror image of that is the substantial export-led growth in the rest of the world. Sometime in the next couple of years, an adjustment will come. It will require rather more policy coordination than we have seen."

[And God knows we've got just the policy folks to see us through]

c. There was this, from Jean-Claude Trichet, President of the European Central Bank:

"It is not sustainable in the long run that the emerging world would finance the industrial world.  It doesn't correspond to the interest of the emerging world, neither to the interest of the industrialized world. It is profoundly abnormal that there is a flow of financing going from the developing world to the industrial economies." He added: "We [in Europe] have to elevate the level of our growth potential through structural reforms. There is an agreement on that, there is a consensus in Europe, and the problem is obviously delivery. It is urgent to deliver."

The session summary on the Environment and the Bottom Line kicks off with "Faced with very real environmental risks, such as worsening climate change, loss of ecosystems, tropical storms and earthquakes, coupled with spiralling insurance costs and rising global energy demands, the participants sought to tackle concern for the environment as a bottom-line issue."

The session on energy supplies offered up two statements that appear to my nonexpert mind to be at odds with each other:

a. Leading energy chiefs have assured that there are adequate world energy supplies, and that the market and governing energy institutions are able to absorb energy shocks. [statement unattributed]

b. Diversification will alleviate pressures on world supplies, agreed Fatih Birol, Chief Economist and Head of the Economic Analysis Division at the International Energy Agency. Governments and companies will have to diversify away from oil and gas, as well as away from traditional suppliers to find new markets.

I couldn't end this without pointing out that one view from the WEF made it into very few American media sources, but lots of foreign media sources, especially in India.  The view?

Davos (Switzerland), Jan. 26 (PTI): Global experts favour outsourcing jobs from developed nations to countries like India and China, even though "anxieties" over job securities exist in US and other parts of the world.

That was picked up quickly by sources like The Hindu.  My Google search of news sources for it, earlier this evening, Feb. 25, found only two American sources: Time magazine and the Seattle Times.

Think that could be because the subject is so touchy here in the job-exporting U.S.?  I mean, really, what are we worried about?  That things would reach the stage where a large state government outsources some Medicaid functions to India?

Say, do you suppose that WEF really stands for We're Effectively F**ked?