China, more than the US is the driver of world economy

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: With a number of economists raising the probability of the US economy sliding into recession next year, the implication on the global economy may range from a fundamental shift in pattern of trade and material flow to a new currency regime where Asian currencies start playing a significant role.

Alan Greenspan, last month said the odds of hard landing of the US economy have increased as consumer spending may slow down due to a decline in house prices. Similar assertions have been made by likes of Richard Syron of Freddie Mac to Lawrence Summers of Harvard University. Although, the mood is more of caution rather of panic at this point, the world may just come out unscathed whatever the fate may hold for US economy.

After 16 years into the current cycle of US trade deficit, which began in 1991, the trend has reversed marking a fundamental shift. For the past two decades, US mainly bought and borrowed while rest of the world sold and saved. The US has been considered having the safest and most liquid financial market and consequently it has been the recipient of the global excess savings. It may be in the interest of Japan, China, Russia and Europe to maintain surpluses against the US in the long run as they tackle serious demographic changes expected to occur in the next few decades.

The US current account deficit that hit an all-time high of 6.8% at the end of 2005 of GDP was down to 5.5% earlier this year. Instead of depending heavily on the US economy as the global growth engine, the world economy could start to become more evenly balanced. No other country seems to have benefited from the seemingly insatiable consumption by the US consumers than China. There is an interesting and ironical connection between US consumers and China. To pay for these imports, the US has to attract $2.1 billion in foreign investment every single day.

Since China opened its economy three decades ago, it has been growing at a blistering pace. It has clocked more than 10% average GDP growth rate for the last 30 years, which is higher than what most developed economies witnessed during their growth days. America was one of China’s most important export markets.