Who Will Stimulate the other Economies?

February 5, 2009 by  
Filed under Economics

As bad as things are in the U.S., other countries have it worse.  Some anecdotal evidence from around world:

Today, the Bank of England lowered its benchmark interest rate to 1%, the lowest its been since the bank was founded in 1694.  Economic experts expect the U.K. economy to shrink in 2009 at a rate faster than any year since 1946, and faster than any other industrialized country.  Inflation in the UK has dropped by 1% in a month (the fastest ever) is expected to fall well below the target rate of 2%.  To me, that is the most amazing statistic.  And get this:  To protest skyrocketing unemployment and fewer work hours, British workers have been staging walkouts at oil refineries and power plants.  Refusing to work because you don’t have enough work to do?  I’m missing the logic there.

The Russian ruble has fallen 35% against the dollar since August 2008.  Since then, foreign investors have pulled more than $290 billion out of the Russian economy.  Falling crude oil prices have caused the Russian central bank to drain off more than a third of its foreign currency reserves in an attempt to slow the decline of the ruble.   Some experts are so concerned about economic instability in Russia that they expect it to fall apart, splitting into yet more separate ethnic economic regions.  As unruly has Russian has become, that is a scary prospect.  On the other hand, Putin and his puppets don’t have the money now to invade any other former Soviet republics so that’s a good thing.

In China, the World Bank –  which had predicted Chinese economic growth of 9.2% in 2009 – has since revised its prediction down to 7.5%.  This is significantly lower than the 9.4% increase in the Chinese GDP in 2008.  The World Bank also expects China’s export growth to shrink to 3.5% compared to 11% in 2008.   That’s huge.  

And to round out the fun economic news from around the world, here is a graph from the International Monetary Fund showing historical and predicted GDP growth rates for world, advanced and developing economies:

The ray of sunshine in the graph is the predicted GDP growth turnaround in 2010.  However, if you read the actual IMF world economic data release, you will find this statement:  the outlook is highly uncertain.

(Sources:  Bloomberg, BBC News, World Bank, International Monetary Fund, and Economy Watch)

My point in mentioning all of the bad world economic news is this.  The U.S. is close to pulling the trigger on a gigantic economic stimulus/spendulus package.  Let’s assume that this package actually stimulates domestic consumer spending on which much of our economy depends.  What about the large component of our economy that depends on foreign trade?  

The World Trade Organization estimates that at least 10% of U.S. jobs are directly dependent on export business.  The WTO also estimates that 25% of U.S. economic growth in the past decade has come from exports of U.S. made products.

If our trading partners do not cause their respective economies to recover on a schedule that parallels ours, won’t our attempts to re-grow our economy hit a foreign trade wall?  Will there be anyone out there buying our stuff?

There is a related foreign trade issue that concerns Mr. ToughMoneyLove.  The 2009 stimulus/spendulus bill includes provisions that prohibit the use of certain imported raw materials on infrastructure projects.  Although this protectionism has a certain nationalistic appeal, our trading partners have already started complaining about it.  It could provoke trade retaliation, further dimming prospects for a rapid recovery.

It seems that the first diplomatic initiative that President Obama will need to launch may be an economic one.  I don’t hear much talk of that right now in Washington.  Shouldn’t there be?

What do you think?

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3 Responses to “Who Will Stimulate the other Economies?”
  1. Curt says:

    Obamas protectionism ideas are going to start a trade war that could lead to a currency war and the demise of the dollar.

  2. Many other countries are planning similar stimulus packages, although the value is smaller. Whereas the US package is roughly 5% of GDP, China ($580B), the EU ($264B), and the UK ($28B) have all announced packages in the range of 1-1.5%. While this may possibly result in slower recoveries, it is also arguable that the US has been among the hardest hit and may recover at a similar rate.

    As for the “Buy American” issue, trade protectionism is only going to lead to a prolonged recovery time for all involved. It’s a bad idea that needs to be dropped.

  3. Adam says:

    The “Buy American” caluse isn’t protectionism, exactly.

    True protectionism would be the use of tariffs to raise the prices of foreign imports above that of domestic goods. This is a statement that you must buy American, even if the American product is more expensive.

    The WTO and already allows for government spending to require the use of domestic raw materials, and other countries routinely require that their government spending be spent on domestic goods.

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