British Prime Minister Gordon Brown and visiting Chinese Premier Wen Jiabao meet the press in London, Feb. 02, 2009. Photo: Xinhua/Lan Hongguang|
The US personal saving rate jumped to 3.6% in December from 2.8% in November as consumers remain beset job fears and the reality that they cannot depend on rising house prices as a substitute for building a nest egg. Meanwhile, Asian countries led by China and Japan, are confronted with the reality that high savings and an over-dependence on exports to the US and the European Union, makes their economies very vulnerable.
The US is South Korea’s second-largest export market and exports fell year-on-year 32.8% in January. In Japan, the December fall was 35% and in Taiwan it was a record 41.9%. In China, the regional growth engine, exports fell 2.8% in December, its second consecutive drop and its largest in a decade.
The pain for Asian economies, means they have to rethink the old model of "Asians make it, Americans buy it," and start boosting domestic consumption, Masahiro Kawai of the Asian Development Bank (ADB) Institute said last week.
"This pattern (of US consumption propping up Asian growth) is rapidly changing and I believe that this change is not simply a temporary phenomenon.
It is going to be more permanent, or at least semi-permanent," Kawai told a seminar held by the Association of Southeast Asian Nations (Asean).
"Asia should remain the factory of the world, but Asians have to start consuming more. Asians have to start spending more,"he said.
"Except for a few isolated months, the saving rate has not been this high since early 1999,"Scott Hoyt of Moody's Economy.com, commented on the US savings rate.
"Consumers are concerned about rapid job losses, declining wealth, and limited access to credit," he said.
US savings rate could further rise, to around 5.0% by the end of 2009, according to a forecast by RDQ Economics.
Dean Maki, Chief US Economist at Barclays Capital, says the fall in saving will weigh on consumer spending over the next couple of years simply due to wealth declines that have already taken place. Because changes in the saving rate lag behind declines in wealth, the effects on savings may just be starting to take hold. (After all, stocks and home prices have been falling for well over a year.) “How long this lasts and how high the savings rate goes depends on how much these assets have to fall,” Maki says. He predicts the saving rate will rise into the 4% to 5% range through 2010.
Saving was above 10% in many years of the 1980s, then between 5% and 9% until the mid-1990s when the values of stocks and home values started rising. Some economists say that while consumers are delaying purchases of big-vakue items, such as cars and appliances, even though they still plan to make those purchases.
However, Goldman Sachseconomists says that the long-term equilibrium for the saving rate at between 6% and 10%. Their baseline forecast assumes a rate closer to 10%. A high savings rate would benefit the US economy in the long run and would bring down its huge current account deficit. Nevertheless, a rise in the savings rate, in the short term, makes the road to recovery, more difficult.
China's Wen in Europe
China announced on Monday, that will set up “procurement missions” to buy goods and technologies in Europe in an effort to stem protectionist sentiment in the region against its exports.
Wen Jiabao, the Chinese premier who was in London on Monday, at the end of a five-day trip to Europe, said the procurement trips would be established as soon as possible.
“Confidence is the most important thing, more important than gold or currency,” Wen said at a meeting with Gordon Brown, the British prime minister, and business leaders. China would seek to purchase commodities and technologies required by its companies in an attempt to “help us restore and shore up confidence in the market”.
He said Chinese companies had signed contracts totalling $15bn (€11.7bn, £10.6bn) during his trip to Europe.
China is the second largest exporter in the world and Europe is China’s largest trading partner.
China remain strongly dependent on European and American consumers in the short-term,
Wen said that China’s main contribution to assisting the recovery from the crisis would be to maintain strong growth at home.
“For China, the fundamentals of its economy are sound and the long-term trend remains unchanged,”he said. However, in a speech at Cambridge University on Monday, he said the global financial crisis had “not yet hit the bottom”.
|The European Union and China are two of the biggest traders in the world. Their bilateral trade increased by 17% in 2007; it has more than doubled between 2003 and 2007.
Trade in goods
EU goods exports to China 2007: €71.6 billion
EU goods imports from China 2007: €230.8 billion
EU's imports from China are mainly industrial goods: machinery & transport equipment and miscellaneous manufactured articles. EU's exports to China are also concentrated on industrial products: machinery & transport equipment, miscellaneous manufactured goods and chemicals.
Trade in services
EU services exports to China 2006: €12.4 billion
EU services imports from China 2006: €11.2 billion
Foreign Direct Investment
EU inward investment to China 2006: €6 billion
China inward investment to EU 2006: €2.1 billion
China's Foreign Ministry said in January, in advance of Wen's trip, that the EU is the largest trade partner of China: "China hopes both sides can strengthen mutual understanding in the economic and trade sectors, seek new cooperation areas and achieve greater growth. China does not deliberately pursue trade surplus. We are willing to make active efforts to promote the balanced development of bilateral trade, and the achievement of this goal will become easier if the EU countries increase high-tech exports to China."