America dodged the Asian financial crisis of 1997-98, but much has changed. Today’s world economic slide is starting to hurt us.
by Ruchir Sharma • Wall Street Journal
Plunging stock prices and slowing economic growth in China have raised anew the question of how much events abroad really matter to the U.S. Many of the answers are quite placid, drawing on the precedents of the 1997-98 Asian financial crisis, when there was similar concern about impacts at home, which never came. The U.S. grew at a 4.5% annual pace during those two years. For much of 2015, when U.S. growth remained steady despite volatile and weak growth in the rest of the world, the optimists said it was like 1997-98 all over again.
That may be, but the world has changed a lot in two decades. After 1998, the U.S. share of global GDP topped out at 32% but has since fallen to 24%, based on my analysis of raw data from the International Monetary Fund, while the emerging-world share bottomed out at 20% but has since doubled to nearly 40%. In that time, China has supplanted the U.S. as the largest contributor to global growth.
The assumption that the U.S. isn’t much influenced by events abroad may be subtly reinforced by widespread talk about “deglobalization,” but this is a bit of a misnomer. While for the first time in decades global trade is no longer growing faster than the global economy, it has retreated only slightly from its peak of around 60% of global GDP in 2012, and is still way up from 45% at the time of the Asian financial crisis, according to data from Haver Analytics. The trading world is much more interconnected than it was in 1998, and since that year the share of foreign trade in the U.S. economy has risen from 18% to 23%.
The sanguine narrative argues that the U.S. is again the safest house in a volatile world, but in the latter half of 2015 signs started to emerge of a slowdown in the U.S. The 2.8% growth rate in the first half dropped in the third quarter and is expected to come in below 2% for the fourth quarter, amid growing signs that this U.S. recovery was more subject to global forces than its predecessors. Since the recovery began in 2009, exports have contributed 15% of U.S. growth, up from an average of 9% during the previous seven postwar recoveries.
The first signs of U.S. weakness emerged in manufacturing, which is deeply influenced by the global economy. Though manufacturing represents a shrinking share of the U.S. economy, now 12% of GDP, it is still a leading indicator, in part because of the outsize role it plays in the financial markets. Manufacturing industries account for some 60% of profits among companies on the S&P 500, which are increasingly reliant on foreign sales. In this decade, American companies have earned 27% of their profits overseas, compared with 17% in the 1990s. By the second half of last year, surveys of manufacturing had started signaling a significant slowdown, with one suggesting a possible contraction.
In 1998 manufacturing and export weakness was offset in the U.S. by falling oil prices, declining interest rates and surging consumer demand. But here too much has changed. In the past, Americans spent virtually all of the windfall from falling oil prices, boosting the economy. This time they are saving 40% of the windfall, perhaps still unnerved by the 2008 crisis.
Since 1998 the U.S. has also emerged as the world’s largest oil producer. The shale energy boom has increased oil production from eight million barrels a day to 12 million. Though America is still a net importer of crude oil, it has become a net exporter of petroleum products, and investment in energy has been hit hard by the sudden drop in oil prices. When oil prices rallied a bit to $60 a barrel in mid-2015, markets expected the price to stabilize. Then it dropped again, driven in part by falling demand in China, to just above $30.
That delivered a psychological shock, which is at least comparable to the dot-com bust of 2000. In late 2014 the total energy investment of large American companies peaked at 2.3% of GDP, nearly double the peak in 2000 for telecom, media and technology investment. The dot-com bust led to a brief recession the following year, and while the shale-oil bust may not cause an outright recession, it is already undermining growth. Since December 2014, energy investment among large U.S. companies has fallen 22% to $340 billion, according to Empirical Research Partners.
The credit markets sense trouble. Since 2009 the U.S. junk-bond market has increased by around 80% to $1.3 trillion; the market for energy junk bonds has increased even faster, up 180% to more than $200 billion, fueled by the Fed’s easy-money policies. Since the Fed began signaling an end to those policies in mid-2014, leading to a surging dollar and falling oil prices, the shale credit boom has been threatening to go bust.
The Fed—which had room to lower rates during the 1997-98 Asian crisis—doesn’t have the same options now that rates are near zero. That doesn’t mean a recession is coming: U.S. households have cut back their debt and increased savings, job growth continues at a decent pace, and America still relies more on exports to Europe and Japan than to slowing China. But this does suggest that 2016 forecasts for U.S. growth that begin with a 2 may have to be revised to begin with a 1. The global slowdown is coming here.
Mr. Sharma is the head of emerging markets and global macro at Morgan Stanley Investment Management, and the author of “The Rise and Fall of Nations” coming in June from Norton.