Business week has just popularised what was previously a minority sport: debating the ‘global savings glut’ issue. Steven Roach has already responded. Really with all this high-powered economics going on, I feel sorry for the ‘layman’, since it must be kind of hard to reach a conclusion about whether or not to buy a house, or whether to take a summer break or wipe the credit card debt instead.
The issues are pretty complex, but I think can be broken down into two main issues.
Firstly why China is saving so much (and the US so little), and secondly the impact of demographic ageing on some key global players: in particular Germany and Japan.
On the second I think the issue is clear enough by now:
“Demographic shifts are driving up savings as well, as aging societies in Japan and Europe accumulate funds for retirement. That’s holding back both consumption and business investment, as many European and Japanese companies are cautious about committing much capital to expand their domestic operations. In Japan, the combination of weak wage growth and strong exports have boosted corporate profits, with a much smaller increase in business investment. The same story also holds in Europe. “Balance sheets of European companies are strong. Cash flow is strong. Everything is fine,” says Herbert Lohneiss, CEO of Siemens Financial Services (SI ), the finance arm of the Munich electronics and engineering giant. “What is not fine is that they do not in- vest enough.”
The reluctance to consume and invest is fueling enormous trade surpluses in Japan and Germany, in particular. The latest data from Japan show a current-account surplus of $171 billion for the year ended April, 2005. That’s up from a surplus of $157 billion a year earlier. Germany, where domestic demand is flat and unemployment is in the double digits, is running a current-account surplus of over $100 billion over the past year.”
So this is clearly one half of the story, and Roach is clearly wrong (in my book) to expect things to change here. But that still leaves us with (among others) China and the US. Why China is saving so much is a hotly disputed issue. Demographics may have something to do with it, as may the increasing pace of structural reform. Last year the Conference Board published a study of productivity and jobs in China a study of productivity and jobs in China. (Unfortunately this *is* – very – pay per view, but you can find a summary here, and an academic paper with similar substance free here).
China is losing more manufacturing jobs than the United States. For the entire economy between 1995 and 2002, China lost 15 million manufacturing jobs, compared with 2 million in the U.S., The Conference Board reports in a study released today.
?As its manufacturing productivity accelerates, China is losing jobs in manufacturing ? many more than the United States is ? and gaining them in services, a pattern that has been playing out in the developed world for many years,? concludes The Conference Board study. According to Robert H. McGuckin, Director of Economic Research at The Conference Board and co-author of the study: ?Increased unemployment has also accompanied the restructuring of the industrial sector, but per capita income has risen over the period.
In China a huge industrial shakeout is taking place, and this is adding to already existing insecurity. In addition the pension system leaves large numbers of people entirely unprotected, which only adds to the urge to save.