Importance of U.S. consumption in the revival of the world economy

By- Nayan Saraf

Since the global financial crisis of 2007-08, there has been a constant debate as to which economy would be the growth engine of the world, considering the complete slowdown of U.S. and the Eurozone. More often than or not, China and many other developing economies such as India, Brazil, Russia and Indonesia have appeared as the best alternatives. But regardless of all the optimism surrounding China and these developing economies, these countries have not been able to improve their performance in the absence of growth in U.S.

It’s not only because of the size of U.S. GDP, but also because of the contribution of consumption factor by U.S., which in itself is responsible for the prosperity of many leading economies. The table given below would give a clearer picture of the world’s two leading economies i.e. U.S. and China and the factors contributing to their GDP.

  Y     = C   + I        + G      + X(EX-IM)
U.S.  ($17.9 Tn) 100% 68.9% 16.3% 17.6% (3.3%)
China ($11.3Tn) 100% 38.1% 43.4% 13.8% 4.7%

It is quite clear that U.S. economy is mainly driven by consumption, whereas China’s is driven by investments (if we consider I + G). Hence, if U.S. economy slows down, it means less consumption, which could result in lower import which in turn may lead to closing off businesses and higher unemployment in exporting countries.

Since the global financial crisis, international weight of U.S. import share has shrunk from 17% to 12%, which is an alarming situation for countries like China, Canada, Mexico, Japan, Germany, U.K., France etc., which run huge trade surplus with U.S. Since U.S. is the largest trading partner of China, accounting for almost 1/5th of its import with a value of over $440 billion, it is very clear that even Chinese economy is worse off without U.S. consumption.

This is the reason that the economies around the world are anxiously waiting for U.S. to recover. And the key factor of reviving U.S. economy has always been consumption, which stands at nearly 70% of its GDP. That is why there have been constant efforts from the government and the FED to increase the consumption by means of lower interest rates, easy mortgage terms, Quantitative easing and easy credit card debt, in order to get the consumer to spend more and get the economy moving again.