[OPE] An underconsumption crisis?

adsl675281@tiscali.nl

Insight: The global spending spree has hit a brick wall 

By Joe Quinlan 

Published: August 27 2008 17:02 | Last updated: August 27 2008 17:02

The US consumer is not the only one feeling down and out. Since the start of the year, higher food and energy prices have undermined consumer confidence not only in Detroit but also in Dusseldorf, Delhi and Dalian. The upshot: a global slump in personal spending is unfolding, portending rockier times for the global economy and world financial markets.

At best, global private consumption expenditures - roughly $32,000bn in nominal dollars in 2007 - are expected to rise by 2-4 per cent this year. That compares with an 11 per cent jump in 2007, and contrasts sharply with the boom in personal spending this decade. 

Global consumption surged 63 per cent between 2001 and 2007, a bonanza fuelled by easy global credit conditions and soaring equity and housing prices. Globalisation and its beneficial effects - lower inflation and lower-cost imports - also boosted consumption. 

So did soaring demand from the developing nations. Indeed, thanks to the emergence of more middle class consumers in countries like China, India, and Poland, coupled with the soaring energy and agricultural wealth of states in the Middle East, Africa and South America, personal consumption in the developing nations has never been stronger. 

To this point, consumer spending in developing nations doubled between 2000 and 2007, from $4,500bn to $9,000bn last year. This splurge in spending drove developing nations' share of global personal consumption to 28.1 per cent of the global total, up nearly 5 percentage points since the start of the decade. It also helped raise developing nations' share of global imports to over 41 per cent last year, a record high.

It was on the assumption that the developing nations had finally unshackled themselves from the developed nations, and were poised to generate more domestic-led growth, that many investors mistakenly bought into the global "decoupling" thesis earlier this year. But there has been nothing of the sort. Lost on the "decouplers" is this - the mood among many consumers in the developing nations is just as foul as it is in the US. Around the world, consumer confidence has been sapped by rising energy and food costs, twin evils compounded by the decision of many governments to roll back, albeit slowly, fuel and food subsidies. The latter have been critical in shielding emerging market consumers from the dramatic spike in global food and energy costs. Yet in the face of soaring commodity prices, the costs associated with subsidising basic staples have become too prohibitive. Many governments have had to shift some of the burden onto consumers, sparking a sharp rise in the number of angry, angst-filled households.

Consumer spending in many developing nations is increasingly being subsumed by basic staples - food and energy - at the expense of more discretionary items. Meanwhile, beyond the urban and rural poor, more well-to-do consumers in the developing nations have seen their spending squeezed by rising interest rates. As inflationary pressures have mounted, tighter monetary conditions have become commonplace in places like China, India and Chile, threatening to not only dampen consumer spending but also curtail private capital investment. 

Add it up and many consumers in emerging markets are just as unhappy and upset as their American counterparts. (...) The darker the mood among global consumers, the longer it will take for global equities to rebound. Still vulnerable are large cap companies in industries such as airlines, automobiles, consumer durables, travel and leisure, and restaurants. 

The writer is chief market strategist at Bank of America http://www.ft.com/cms/s/0/cc8355ae-7449-11dd-bc91-0000779fd18c.html

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