ANALYSIS: Anxious world might wait in vain for ailing Superman US to rescue it this time

Washington — During a blue-sky moment in 2018 near the end of a decade-long economic expansion, it was the US that helped pull the world along as the extra cash from tax cuts and government spending flowed through domestic and global markets.

But if it was US policy that pushed the world higher then, it is US policy that threatens to pull the world under now as the country’s troubled response to the coronavirus pandemic emerges as a chief risk to any sustained global recovery.

Officials from Mexico to Japan are already on edge. Exports have taken a hit in Germany, and Canada looks south warily knowing that any further hit to US growth will undoubtedly spill over.

“Globally there will be difficult months and years ahead and it is of particular concern that the number of Covid-19 cases is still rising,” the IMF said in a review of the US economy that cited “social unrest” due to rising poverty as one of the risks to economic growth.

“The risk ahead is that a large share of the US population will have to contend with an important deterioration of living standards and significant economic hardship for several years. This, in turn, can further weaken demand and worsen longer-term headwinds to growth.”

It was a clinical description of a grim set of facts: After the US government committed about $3-trillion to support the economy through a round of restrictions on activity imposed to curb the virus in April and May, the disease is surging in the US to record levels just as those support programmes are due to expire. More than 3.6-million people have been infected and 140,000 killed. Daily growth in cases has tripled to more than 70,000 since mid-May, and the seven-day moving average of deaths, after falling steadily from April to July, has turned higher.

Weight added

Meanwhile the country has fractured over issues such as mask-wearing that in other parts of the world were adopted readily as a matter of common courtesy. With some key states such as Texas and California now reimposing restrictions, analysts have already noted a possible plateau to the US recovery with the country still 13.3-million jobs shy of the number in February.

For other major economic powers, that is a weight added to their own struggles with the virus and the economic fallout.

The US economy accounts for about a quarter of world GDP. Though much of that is service-related, and much of the direct impact of the virus is tied up in industries such as restaurants with weak links to the global economy, the connections are still there. A lost job leads to lower consumer spending leads to fewer imports; weak business conditions lead to less investment in the equipment or supplies that are often produced elsewhere.

Year-to-date US imports through May are down more than 13%, or about $176bn.

In Germany, whose measures to contain the pandemic are considered to have been among the most effective, exports to the US plunged 36% year-over-year in May. Analysts see little prospect for improvement, with year-to-date US car sales through June down nearly 24% from a year earlier.

“That is really a disappointment,” said Gabriel Felbermayr, president of the Kiel Institute for the World Economy, has told radio network Deutschlandfunk. The spike in US infections, he said, could not have been expected.

In Japan, the speed of the recovery is seen tied directly to US success in stemming the virus.

“Japan’s recovery will be really delayed if the spreading of the coronavirus in the US isn’t stopped and US-bound exports from various Asian countries don’t grow,” said Hideo Kumano, a former Bank of Japan official who is now chief economist at Dai-ichi Life Research Institute.

The IMF projected US GDP will shrink this year by 6.6%, in line with many analysts’ projections.

The Bank of Canada is more pessimistic, forecasting US GDP to fall 8.1% on the year. That has already been lowered once as the health situation decayed.

A further leg down would hit Canada directly, with perhaps three-fourths of the country’s exports headed over the US border.

Deflected criticism

“We did take down our US projection … I would underline that there’s a lot of uncertainty, and the principle source of the uncertainty is the evolution of the coronavirus itself,” said BOC governor Tiff Macklem.

At the southern border, Mexico is also posting record daily numbers of new cases, but President Andres Manuel Lopez Obrador has at times deflected criticism of his government’s efforts by pointing to the US numbers.

Lopez Obrador undertook a risky visit with President Donald Trump earlier in July, couching his journey to Washington as a matter of economic necessity as Mexico attempts to revive an economy that could shrink 10% or more this year, according to forecasts.

The Mexican president hopes the new US-Mexico-Canada Agreement (USMCA) trade deal, which took effect on July 1, will spur business and investment, but pessimism about the outlook has been growing.

“To the point that people in the US are losing jobs or incomes it is a downward weight … and it will have ramifications on the ability to consume globally,” said Elizabeth Crofoot, senior economist at the Conference Board, which documented a record drop in global consumer confidence in a recent survey.

“We take one step forward and two steps back.”

Reuters