When Does the US Stop Mattering?

It used to be the case that when the US sneezed, the rest of the world caught a cold. The US economy was so large that it dominated not only North America, but the rest of the world.

In 1990, for instance, the US accounted for 24.7% of global GDP according to the IMF. By 2000, this had fallen to 23.5% and currently stands at 19.1%. The US has not contracted over this period, instead other countries have prospered and grown at a faster pace. China, for instance, was just 3.9% of world GDP in 1990, whereas now it ranks as the second largest economy in the world at 15% of world GDP. The IMF forecasts that by 2016, China will surpass the US as the world’s largest economy, with 18% of world output versus 17.8% for the US.

Judging by the markets over the last two month,s the US still matters enormously. Ben Bernanke mentioned the possibility that the US Federal Reserve would commence to unwind its open market purchases of bonds in May, and there was an instant repricing of global assets. Not only did the US bond market fall, as it should have, but the emerging markets, the European markets, the world stock markets and even non-US Dollar denominated bond markets followed. Should this have happened?

While the US is clearly important, it is not as important as it used to be. In 1992 US was the world growth engine, but this has changed with the emerging markets and Asia, in particular, driving GDP growth. The massive global sell-off triggered by Bernanke’s comments does not seem justified. When will the markets realise this?

It seems that the world markets might suddenly be waking up to the realisation that the US does not matter that much any more. Take, as an example, the reaction to the strong employment numbers that were announced on July 5. The US markets reacted to the number as they should have, with the bond market falling and the stock market rising. But the rest of the world markets were basically unaffected. In addition, the losses that were experienced in the emerging markets and the foreign bond markets following Bernanke’s comments have largely been retraced.

With the US fading out of the picture, eyes are now turning to Asia, and to China in particular. The IMF’s long-term forecast is for Chinese GDP to be double that of the US by 2050. At that point, the US will cease to matter.