With economies from Brazil to China to South Africa struggling, the US consumer has been touted as the main driver of global growth.
Unfortunately, American shoppers just can’t cut it anymore.
“The US consumer alone does not have the ability to right the ship,” Chief Market Strategist Joe Quinlan at Bank of America Merrill Lynch’s US Trust division told Business Insider.
“That means the US consumer can’t drag the rest of the world back to growth. The rest of the world is getting a free ride off of us right now, but they are going to have to help themselves.”
“Just isn’t the powerful global engine it once was”
In a report on Thursday, Quinlan laid out the case that the US consumer no longer makes up a big enough piece of the global economy to keep everything afloat.
For example, the US share of both total imports and personal consumption expenditures have fallen. In trade, the US once represented 20% of the world’s imports, now that is just 13%.
However, with economies and markets outside of the US struggling, American consumers are being asked to do more than they can, in Quinlan’s view.
“Consumption-led growth will help the U.S. economy expand by 2 — 2.5% again this year,” wrote Quinlan. “That’s good but not good enough for cyclical and structural reasons to prevent further downward pressure on global growth. The U.S. consumer just isn’t the powerful global growth engine it once was.”
But it’s not all bad, according to Quinlan. Right now consumers are dealing with issues such as paying down debt, rising healthcare costs, and slower wage growth. And in order to be as important to the global economy as they once were, Quinlan said consumers would have to go down a dangerous path.
“I wouldn’t want us to be the single driver anymore,” he told us. “That would drive up debt tremendously and mean the US consumer would be less healthy in the future. That’s dangerous.”
To Quinlan, for the US to stay safe developing economies will have to pick up a heavier amount of the global growth load.
“These economies need to make serious changes,” Quinlan said. “They need tax reform, serious infrastructure investments and build outs, investments in growing local business.”
“[The world economy] is too central bank dependent, not just the US, but globally,” he told us. “You can’t debase your currency to growth.”
The biggest threat if these economies don’t begin to make changes, said Quinlan, is an economic hard landing in China. In that scenario the country could drag the entire world, including the US, into a global recession.
“China and the US are now the two big boys of the global economy in terms of imports, consumption, and growth,” he said. “If China has a hard landing, there is a good chance that the world could end up in a recession. We can’t take the place of or substitute for China if they go down.”
Quinlan said that he expects that the Chinese government can stabilise its economy, noting that the government still has “a lot of financial firepower” including trade and current account surpluses. But without changes from other emerging economies the risks are still high.
As for the near-term outlook in the US, Quinlan thinks the recession fears “are overdone,” citing the strength of consumers.
So while American shoppers can certainly keep the US chugging along right now, they won’t be enough to help the world regain a growth path in the future.
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