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News : International Last Updated: May 27, 2010 - 6:46:04 AM


IMF chief says US consumer is currently the engine of worldwide growth
By Michael Hennigan, Founder and editor of Finfacts
May 26, 2010 - 4:22:44 AM

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International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn participates in a Globo News televised debate entitled "Global Economy in a Post-Crisis World" during his visit to São Paulo, Brazil, Tuesday, May 25, 2010.

IMF Managing Director Dominique Strauss-Kahn said on Tuesday that the US consumer is currently the engine of worldwide growth.

The American economy has picked up recently, with consumer spending jumping higher and debt falling sharply. The Conference Board's consumer sentiment index  as reported on Tuesday, rose to 63.3 in May from 57.7 the month before. This is the third consecutive month of increase and the highest since March 2008. Adding to the optimistic outlook, US consumers think the outlook is brighter. The expectations component of the index jumped to 85.3 from 77.4 -- the highest level since August 2007 before the start of the US recession in December of that year.

The loss of wealth in home and stock values was a significant factor holding back consumer spending during the recession. That wealth is beginning to recover but a major slide in the stock market would reverse those gains and cause consumers to become more cautious again.

Standard & Poor's economists  expect consumers to be more cautious than they were before the recession, but the saving rate now seems more likely to settle near its March level of 2.7% rather than the 5% it hit late last year and a dip below zero in 2005.

Up until now, consumers have been spending money while still cutting down on debt. In March, consumer installment debt (basically, everything except real-estate-secured debt), rose $2.0bn, only its second increase in 13 months.

However, relying on the US consumer is a precarious scenario.

Stephen Roach, the veteran Morgan Stanley economist and currently chairman of the Asia region, said that starting in the late 1990s, the US economy went through an ominous transformation. Income-short consumers discovered the miracle drug of a new source of purchasing power - - the seemingly open-ended wealth creation of ever-frothy asset markets. First equities, then residential property, American households drew on asset appreciation to consume well beyond their means. He said real private sector compensation - -  the broadest measure of the economy’s endogenous income flows - -  currently stood at only about 13% above its early 2002 levels in inflation-adjusted terms. Yet personal consumption surged to a record 72% of real GDP in early 2007  --  a spending binge without precedent in US history, or for that matter in the long history of any leading economy in the modern era.

Wealth creation closed the gap - - driven especially in recent years by the self-reinforcing feedbacks between housing and credit bubbles. Courtesy of new "breakthroughs" in mortgage finance - - breakthroughs, in retrospect, that were more destructive than constructive - - homeowners tapped the seemingly open-ended home equity till as never before. Net equity extraction from residential property surged from about 3% of disposable personal income in 2000 to nearly 9% in 2006. This provided newfound support to spending and saving that allowed households to more than compensate for the extraordinary shortfall of labour income generation. The result was not only the consumption binge, but also a profound shortfall of income-based saving. The personal saving rate slid into negative territory in late 2005 for the first time since the 1930s.

Lacking in income-based saving, the US imported surplus saving from abroad in order to keep growing. But it had to run massive external deficits in order to attract the capital - -  sufficient to push the current-account deficit up to a record 6.5% of US GDP by the third quarter of 2006. Roach said the impact of that development was global in scope - - deficits must always be matched by surpluses elsewhere in the world. Courtesy of America’s gaping external shortfall, global imbalances - - the absolute sum of the world’s current account deficits and surpluses — soared to 6% of world GDP in 2006, nearly triple the 2% reading of a decade earlier. Joined at the hip, asset bubbles and global imbalances stretched the macro fabric of the global economy as never before.

In his book on Asia, Dr. Roach says that almost 80% of China's GDP goes to exports (30%) and fixed investment (50%). Since the early 1990s its per-capita income has increased fivefold; America accounts for about 5.0% of the world's population and about $10 trillion of consumer spending in 2008; China and India together account for 37% of population and only $2.5 trillion on spending.

IMF

The world avoided a great economic depression and will recover thanks to close cooperation from the international community, said IMF chief Dominique Strauss-Kahn in São Paulo, Brazil on Tuesday.

Referring to a critical lesson from the recent crisis, he said success came from the approach championed by world leaders of the G-20 group of advanced and emerging economies and the IMF at the height of the crisis.

“National oriented responses are not the way, since they risk creating economic conflicts,” said Strauss-Kahn, adding that financial regulation in particular should be coordinated internationally.

Strauss-Kahn made the remarks at the start of his week long trip to Brazil and Peru, where he will meet with business leaders, officials and students to discuss the challenges facing the global economy and how the IMF can harness global cooperation in the recovery.

Speaking in São Paulo, Brazil’s financial capital, in a televised debate on GloboNews, the IMF Managing Director described Brazil as a “success story.”

New sources of growth

In remarks and in a question and answer period session in front of an audience of 200 people, including academics, the private sector and the press, Strauss-Kahn tackled the question of new sources of growth in the global economy.

“We have seen China adopt a massive stimulus package geared towards reactivating internal demand, and moving away from its export model, and US consumers have started saving more, which also shows some change,” said Strauss-Kahn. “One must not forget however that the US consumer is currently the engine of worldwide growth so you can’t find a solution to the problem overnight. It is a lengthy process that will only take place gradually.”

Addressing the need to support the recovery and create sustainable growth in the long run, Strauss-Kahn said there is a "need for fiscal consolidation globally, but there is no future in fiscal consolidation without growth."

Emerging economies stronger role

Strauss-Kahn said the strength of the IMF lies in “truth telling,” and the IMF’s role in the surveillance of the global economy includes overseeing the implementation of rules that govern financial regulation. He said one of the tools at the IMF’s disposal is the Financial Sector Assessment Program, which examines and identifies the strengths and vulnerabilities of a country's financial system.

As a regional economic powerhouse, the Brazilian audience was interested in Strauss-Kahn’s views about the role of emerging economies in the global economy and the governance of the IMF.

“Emerging economies participate actively in the decision making at the Fund and their voice is much more powerful than in the past,” the IMF chief said. “I think we can no longer say that the IMF is an institution at the hands of the United States or Europe. However, this greater influence and greater power must be translated formally in the Fund workings.” 

Strauss-Kahn also addressed the vestiges of the IMF’s past in Latin America, and said there is no one-size-fits-all solution for countries’ economic problems. He said the global lender is called into action when a country needs help, the way a doctor treats a patient with an illness.

The IMF chief continues his visit to Brazil with a meeting in Brasilia with President Luiz Inácio Lula da Silva, and with Finance Minister Guido Mantega.

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