It is quite possible that our future prosperity depends far more on US consumers than it does on almost any policy which our own Government may choose to implement.
The US consumer has basically been propping up the entire world economy, importing goods from Japan and from the EU as well as consuming more and more at home.
As a result the trade gap between the US and the rest of the world has been growing ever wider and most people believe that this must be unsustainable over the longer term. It can either adjust, because the rest of the world decides it will not keep financing the US and switches back to the euro and the yen, or something happens to persuade the US consumer to spend a little less. The latter would now appear to be the more likely outcome, according to commentators such as Mr Gavin Davies, chief economist at Goldman Sachs, and Davy's chief economist, Mr Jim O'Leary. The figures are quite stark. The US ran a current account deficit of about $230 billion (€205 billion), or 2.7 per cent of Gross
Domestic Product (GDP), last year. It is expected to rise to more than 3 per cent of GDP, or about $300 billion, in 1999. In contrast, the EU and Japan are expected to run surpluses amounting to about 1.5 per cent and 3.5 per cent of GDP respectively this year. And the US deficit has been rising every year since 1995, with the increase over the 1995-99 period likely to be some $170 billion, or 1.6 per cent of GDP.
Over the same period the surpluses recorded by the other two major blocs will have expanded considerably, by $75 billion (0.8 per cent of GDP) in the case of the EU, and $35 billion (1.3 per cent of GDP) in the case of Japan.
And more worryingly, the rate at which the gaps have widened has accelerated since the global economy first entered crisis mode in 1997. This means that the US has almost single-handedly borne the brunt of adjustments since.
And the main sector propping it all up is US consumers. They have moved from a small surplus of about 0.5 per cent of GDP in 1995 to a record deficit that is expected to be about 4 per cent of GDP this year.
Most of this is made up of households which ran an incredible $400 billion deficit last year, the equivalent of 4.5 per cent of GDP. This basically means that they have been spending far more than their disposable incomes and have been increasing spending far faster than their incomes have been rising. There are now few savings and the savings rate has fallen to zero.
Of course the reason that they have been willing to splurge en masse is their belief in the inexorable rise in the Dow. The faster the Dow rises the greater capital gains they see and the wealthier they feel. Indeed, it is not just a wealth effect - many of the mutual funds in the US now allow partial withdrawals at very low charges. This means more and more US consumers are actually using their mutual funds as short-term savings. Some, at least, are withdrawing money to pay for items such as new stereos or sofas. One result is that last year the total increase in household spending accounted for almost the total rise in US GDP.
And as analysts point out, all this is predicated on continuing, rapidly rising equity prices. It is quite conceivable that a crash is required for spending to fall off rapidly.
US consumers are not spending because of the actual level of the Dow but because of the rate of increase. This means that if the rate of increase slows down significantly consumers may stop spending, or at least scale back a good deal. Of course if the market were to really fall, then the downturn would be more severe and probably last for longer.
It is unlikely that the global economy could cope well with such a scenario. Ireland may have so far escaped the worst impact of the crises but a downturn in the US would be significantly more difficult to weather.
All of these problems could possibly be averted through action in other parts of the world. If the Japanese consumer started spending the situation would look very different. But there is little reason to believe that will happen any time soon.
The Japanese government has already done as much as it can be expected to do, cutting rates to all-time lows, introducing huge tax-cutting packages and pouring money into the economy. But still the Japanese consumer sits at home and refuses to spend.
The other bloc which could help is of course the EU which could adopt a very reflationary policy. But the problem here is that the European Central Bank appears more disposed to allowing deflation than risking reflation and large cuts in interest rates are unlikely.
Individual governments too could do their part but so far the senior politicians in Germany and France appear to have a preference for blaming the central bankers rather than taking action themselves.
But if the US consumer does stop spending, they may be faced with little choice. The major European economies are hardly booming and a quick return to full-blown recession would not be a result any policymaker would like to see, particularly if it could in any way be blamed on the creation of the single currency.
