A worrying economic question these days is the possibility of a return to negative GDP growth in the U.S, the dreaded double dip. If it happened it could pull much of the world back into recession, possibly triggering another round of financial crisis. Though all but a few consider this a low possibility, it’s not so low as to be off the radar. Economists I follow generally put the risk of a U.S. double dip at somewhere between 20% and 35%.
There’s ample evidence that the U.S. economy is not out of the woods yet. U.S. consumers picked up spending slightly last month, but they are still tentative and their debt levels remain high. Businesses are watching consumers closely because managers are reluctant to commit to new hiring and investment while so many people are out of work. Consumer spending picked up slightly in July, but confidence is weak and retailers are hurting. The latest signs of this come from back-to-school shopping, where price cutting ruled, and tumbling U.S. auto sales (down 21% in August).
There is talk of a second federal stimulus but nobody can count those chickens until they hatch. The chicken you can count on, though, is the economic energy coming from developing markets, specifically the BRICS (Brazil, Russia, India, China). Though the BRICs will advance in fits and starts—for more on this, see Michael Schuman’s insightful post on India and China—the fact of their increasing consumption power now feeds into the global growth calculation in a meaningful way. The good news is that BRIC growth increasingly makes U.S. growth shortfalls in the years ahead less of a threat for the world economy.
According to work by Jim O’Neill, who heads Goldman Sachs’ global economics team, the current value of consumption in the BRIC countries is roughly $4 trillion, still less than half of the $10.5 trillion that U.S. consumers spend. But O’Neill sees a powerful lift from these countries in the years just ahead. With BRIC consumption growing by roughly 15% per year, he estimates, it should rival that of U.S. consumption by the end of the decade. The world will feel the beneficial effects sooner. BRIC consumption is already growing by roughly $600 billion a year and should rise to $1 trillion a year by the middle of the decade, says O’Neill. Such demand does not all land at the U.S. doorstep but it does flow to the world, providing a nice offset to what is likely to be long-term weakness in U.S. consumption. That’s good news for all.