It’s rarely been more expensive to be an American abroad.A dollar will now buy you less than 50p in Britain, and it’s at an all-time low in the eurozone.
That’s certainly bad news for Americans who are traveling, and for those poor benighted UK-based American investment bankers whose bonuses apparently are calculated in dollars. As Hamish McRae put it in the Independent on Sunday, the ‘poor dears’.
But it’s not just itinerant Americans who should fear the weak dollar…
The big economic question at the moment is this: can the rest of the world keep merrily growing if America goes into recession and has to retire from the field for a while?
The answer to many, seems yes: a desire to believe wholeheartedly in the ‘decoupling’ story is what’s driving emerging markets to their recent highs. The ‘global growth’ story is seen as the driver for the next big bubble, and people are desperate to jump on the bandwagon before the gains peter out.
However, others are less convinced that this happy scenario can come to pass. As Morgan Stanley’s Stephen Roach points out: “The American consumer has been the dominant engine on the demand side of the global economy for the past 11 years,” accounting for 19% of world GDP.
But now jobs growth is slowing, house prices are falling and only set to get worse – Roach expects declines in both 2008 and 2009. With people unable to rely on their properties to fund their spending anymore, and in fear for their jobs, even the legendary US consumer is going to find it harder to keep up their shopping habits in the near future. “I don’t see any way that saving-short, overly-indebted American consumers can maintain excessive consumption growth,” as Roach puts it.
That suggests a “high and rising recession risk” for America. “Unfortunately the same prognosis is likely for a still US-centric global economy.”
Roach points out that developing Asia relies extremely heavily on exports – in the past 25 years, exports have grown from accounting for less than 20% of the economy in 1980 to more than 45% today. Meanwhile, domestic consumption has sank from 67% to less than 50% at the same time. Given that a fifth of Chinese exports go to America, a recession there is clearly going to be problematic.
The falling dollar just makes all of this worse. A falling dollar means imports from other countries become more expensive for American consumers. If the price of goods is rising, even as their house prices and job security are in decline, then Americans will be under even more pressure to stop buying.
It’s not just Asia that will feel the pain from this. It’s Europe too – in fact, if anything, the eurozone will suffer more. As Liam Halligan points out in The Sunday Telegraph, “recent events in the world’s financial markets have given Europe a serious jolt.” The region is now expected to see growth slow sharply, from 3.1% last year, to 2% this year. “The main reason is that Europe is also export-driven.”
As Halligan points out “until recently eurozone exports were growing at an annual rate of 10%. By the end of this year, that rate may not even be 5% - a fall that will spook European consumers and businesses, undermining the continental economies.”
It’s much worse for Europe, because the euro is a free-floating currency (most Asian and Gulf State currencies basically track the dollar through official or unofficial dollar pegs). That means that so far it has borne the brunt of the dollar collapse. If the Federal Reserve cuts rates again this week – which is a distinct possibility – European exporters will be even more miserable.
As one Italian exporter comments to Ambrose Evans-Pritchard in The Telegraph: “The euro has risen 60% against the dollar since 2001. Until now companies have held share by squeezing margins but it’s no longer possible at this level. A strong currency is one thing. It is quite another when the exchange rate completely decouples from the real economy.”
But with German inflation hitting 2.7% in September, the chances of the European Central Bank relieving the pain with a rate cut any time soon is highly unlikely. This can only contribute to political instability in the eurozone.
Of course, in the meantime, as the eurozone bears the brunt of the pain, Asia may well continue to prosper in the short term. So it’s no surprise that people are continuing to pile into the region – and the best may be yet to come. You can find out more about the best way to play the global growth ‘bubble’ in the current issue of MoneyWeek. If you’re not already a subscriber, then why not sign up for a three-week free trial?(www.moneyweek.com/file/194/subscribe-from-not-logged-in.html)
source-Money Morning