What’s Stopping Robust Recovery?

MILAN – The growth map of the global economy is relatively clear. The US is in a partial recovery, with growth at 1.5-2% and lagging employment. Europe as a whole is barely above zero growth, with large variations among countries, though with some evidence of painful re-convergence, at least in terms of nominal unit labor costs. China’s growth, meanwhile, is leveling off at 7%, with other developing countries preparing for higher interest rates.

Many advanced economies must still address the end of the pre-crisis growth pattern generated by excessive domestic demand. In such economies, that pattern not only typically depended on leverage; it also enlarged the non-tradable side of the economy and shrank the tradable side. And yet, given that the non-tradable sector is constrained by its reliance on domestic demand, recovery – if it comes – will depend on the tradable sector’s growth potential.

To realize that potential, the tradable sector has to re-expand at the margin: as a weakening currency causes imports to fall and real unit labor costs decline as nominal wages flatten out, unemployed labor and capital flow toward external markets for goods, services, and resources.

This is already happening in the United States, where exports are above their previous peak while imports remain subdued; the current-account deficit is declining; and even net employment in the tradable sector is increasing (for the first time in two decades). Indeed, recent data suggest that more than half of the acceleration in US growth is occurring on the tradable side, even though it accounts for only about one-third of the economy. And that contribution is probably an underestimate, because income generated on the tradable supply side produces income that becomes demand on the non-tradable side – a multiplier effect that crosses the tradable/non-tradable boundary.