What makes for a true recovery? Some are counting on government stimulus. Others say it can’t happen without revived international trade. Still others say it’s about prices, or a confidence thing. These elements help, but ultimately a true recovery has to be about consumption. It dominates the other elements of GDP, and in many ways, drives them. So, how are the world’s consumers faring?
Over the last year, not very well. Much of the excessive economic activity that occurred prior to the recession involved consumers. Those excesses – over-consumption and frenzied housing market activity – are being worked off, but at a huge cost to current spending. In most economies, consumer spending accounts for about 60% of GDP, with US consumers an outlier at a hefty 70%. Together, US, Western European and Japanese consumers account for about 30% of world GDP. As such, the significant consumer retrenchment in the West is playing a huge role in the global recession.
But in recent weeks, certain key indicators have brightened, sparking a lot of recovery-talk. Is the mighty consumer playing a role? Broadly speaking, not yet. France and Germany proudly proclaimed an end to their respective recessions two weeks ago. In France’s case, consumer spending accelerated, but the rise was still modest. In Germany, retail activity remained soft. Consumer confidence has risen steadily from its extreme lows in Japan, but to date, it hasn’t affected shopping. In the US, core retail sales declined in July for the fifth straight month. Apart from the temporary gains due to the ‘cash for clunkers’ program, US consumers aren’t yet back in the driver’s seat.
Consumers are also a big part of emerging market GDP. In China, they account for 35% of the economy. And at present, they appear to be spending 15% more in retail outlets than at this time last year. Are China’s consumers leading the world to recovery? Not likely. Sales were dropping off sharply before public stimulus – aggressive monetary policy, cash handouts and stimulus-related employment gains – puffed the numbers up again, so there are questions about the durability of renewed growth. Measurement problems also suggest that what you see isn’t always what you get.
Like it or not, the world will still need the consumption powerhouses in developed markets to lead the charge in the next recovery. But they aren’t ready yet. Unemployment is still rising in Western economies. Consumers are still deleveraging, a process that is taking hundreds of billions of dollars away from current consumption. In most cases, confidence remains fragile. Moreover, key evidence suggests that consumers are still working off the excessive spending that occurred in the boom years.
What will it take to get the big consumers back on their feet? The mechanisms are already underway. Sharply lower prices are helping to clear housing-market excesses and stretch paycheques further. Meanwhile, underlying demand – essentially population-driven – is steadily rising. When lower pricing and rising demand meet, prices will stabilize, and confidence will begin to return. But the turning point is not imminent – this balance is not expected to be struck in the big economies until about mid-2010.
The bottom line? There’s a lot of recovery hype at the moment, but the party won’t get underway without consumers. Stimulus measures will give a temporary lift to spending here and there, but lasting recovery awaits the resurgence of fundamental demand, and that is still months away.