U.S. credit crunch squeezes global trade
In today's interconnected and wired world, what happens in one major market inevitably reverberates in others around the globe. So it's not surprising that economies worldwide are feeling the effects of the U.S. economic slowdown.
In the United States the news remains bleak, with credit availability continuing to tighten as financial distress spreads well beyond the mortgage market. Financial institutions that are taking heavy losses in that market are reducing their risk exposures across the board. Moreover, the availability and costs of financing for businesses, consumers, and state and local governments have deteriorated to such a point that lower interest rates for the banks are not translating into lower rates to borrowers. In fact, it's quite the reverse, with banks raising their rates and showing an unwillingness to lend.
The United States is experiencing a true "credit crunch," the likes of which has not been seen in decades. A credit crunch is a sudden reduction in the availability of loans or a sudden increase in the cost of obtaining a loan. It often is caused by a sustained period of lax and inappropriate lending, which results in losses for lending institutions and investors when the loans turn sour and the full extent of bad debts becomes known.
That's one reason the future looks threatening and uncertain. President Franklin D. Roosevelt's Depression-era assertion, "The only thing we have to fear is fear itself," has become the mantra recently, a reminder that an economic crash hinges on psychology — in other words, on a crisis of confidence among lenders and spenders.
Although the U.S. economy hasn't plunged into that abyss quite yet, it is teetering on the edge, and it is doing so while the U.S. dollar continues to weaken. The crisis probably is not as bad as all the negative news headlines would seem to indicate, and it should not cause a severe recession. Nevertheless, it will have an undeniable impact, not just on the United States but on its trading partners as well.
Dollar's decline hits hard
Since an estimated 70 percent of the U.S. gross domestic product (GDP) is linked to consumption, a drop in consumer spending will have an impact on trade and cause repercussions for trading partners. One can only hope that Europe will maintain its confidence and avoid a similar decline in trade while providing some of the relative optimism the markets could use right now.
The declining dollar has investors shifting to the commodity markets, pushing up the price of oil to an unsustainable level that is creating further inflationary pressures. Other commodity prices, particularly for grains and other foodstuffs, have also increased dramatically, in some cases reaching record highs. The countries that are least able to deal with rising prices are the ones that are being hit the hardest.
Much of the rise in prices stems from policies of the U.S. Federal Reserve, which is using lower interest rates as its primary tool for staving off a recession. The dollar has depreciated 33 percent against the euro since November 2005, but it appears as if the Fed does not care about a weak dollar for now. In fact, the Fed's policies have prompted the European Central Bank to complain about excessive movement in the exchange rate.
Based on the financial turmoil in the United States, Global Insight is projecting that world GDP growth will decline from nearly 4 percent last year to closer to 3 percent this year, a drop of one-quarter. The impact of that decline on global industrial production will increasingly be felt in the second half of the year. For example, the weakness of U.S. imports in 2007 and 2008 is having a significant effect on global containerized trade in general and on the three east-west "headhaul" (major container export) routes in particular. These three routes represent more than 26 percent of the global deep-sea container trade by volume. As highlighted in Figures 1 and 2, the headhaul routes are expected to recover in 2009.
In the longer term, we forecast world container volumes will grow on average above 7 percent per year.
The upside of exports
The dollar's downward slide may be bad news for U.S. consumers —it means that prices for imported goods are rising —but it is dramatically improving the competitiveness of U.S. producers. U.S. exports rose 8.1 percent in 2007, and they should rise a similar 8.3 percent this year. Export growth, in fact, is helping to prevent a more severe economic downturn.
Other regions are managing to hold their own. Growth in Asia also looks solid, but there are signs that Europe is losing steam, partly because U.S. goods are gaining at Europe's expense as the dollar falls, and partly because some housing markets there (the United Kingdom, for one) are declining.
The outlook for international trade's contribution to U.S. GDP growth is illustrated in Figure 3.
Despite the United States' credit woes, the strength of U.S. exports will continue to have a positive effect on the country's GDP through 2009. And a stronger U.S. economy will help to prop up economies worldwide.