Good news is so hard to find in the global economy that we must search for it in bad news.
In fact, the most encouraging developments lie in China's slowdown, the euro's declines, Asia's waning exports, and even in the stubborn refusal of U.S. wages to keep pace with inflation. These are all necessary, if painful, elements in a much-needed global rebalancing. Only with such changes can the debt-laden economies of Europe and the U.S. become more competitive while China and other export-dependent nations increase their consumption of foreign-made merchandise. Only through this pain can the world return to sustainable growth.
But the process has a long way to go. And it could easily be derailed. If policy makers allow currency misalignments to arise, for example, or fall back on the policies that created the global savings and spending imbalances in the first place, the adjustment will merely be postponed at greater cost to all.
But first, the "good" news.
In China, everything from falling property sales to below-trend electricity output has led economists to cut their full-year GDP forecasts this month. Yet spending by Chinese households, until now regarded as the world's most prodigious savers, registered a 12% gain from a year earlier and a 16% increase for rural areas.
The policy measures behind this spending splurge are the same ones making life difficult for Chinese exporters, construction companies and property developers: a managed appreciation in the yuan since July 2010; hikes in minimum wages; reforms to an interest rate system that had penalized savers and benefited borrowers. These changes boosted households' wealth and purchasing power, giving them the wherewithal to buy products from the U.S. and Europe.
This is precisely what the U.S. has been badgering Asian countries to do for years, a shift that will eventually relieve debt-burdened American consumers of their role as the world's premier source of demand. In the process, China will also reduce its dangerous dependence on overinvestment and ease the threat of a debt crisis. All of that is good. The downside is that the slowdown in exports and construction will in the interim squeeze aggregate Chinese growth.
In crisis-wracked Europe, change works the other way. While euro-zone GDP was contracting by 0.2% in the second quarter, the region's exports surged. In June, they were up 12% on the year, which when combined with a more modest 2% increase in imports produced the biggest monthly trade surplus since euro zone-wide recordkeeping began in 1999. The losers in that equation are traditional exporting countries such as Taiwan and South Korea, whose foreign revenues are plunging. But right now, it's probably fair to say that Europe needs an export boom more than the two East Asian tigers do.
As Chinese increase their spending while besieged Europeans cut back, the former are picking up some of the slack left by the latter's shrinking demand. Meanwhile, fiscal austerity and wage reductions -- along with the euro's 22% decline from its high of mid-2008 -- all make Europe's cost base more competitive on the world stage.
And what of the United States? There, the dark clouds from a similarly massive, postcrisis adjustment in the cost base -- achieved via subpar wage growth, a sharp correction in property prices and a 11% decline in the WSJ dollar index since February 2009 -- are finally revealing a silver lining. The bubble-inducing model of credit-fueled, consumption-led growth is making room for a recovery in manufacturing. This too reflects global rebalancing.
If the world can keep this up, Europeans will get the driver of recovery they desperately need, Americans will have new, productive industries in which to invest their innovative energies and Chinese working- and middle-class households will enjoy the material comforts that decades of hard work deserves.
The problem is there is much more adjustment to come. The euro must weaken further--which demands lower interest rates from the European Central Bank--even though that would make imports more expensive and could stir inflation. China must put the brakes even harder on the savings-fueled investment machine, even if it threatens jobs. The U.S. must resist falling back on easy credit for consumers and instead steer resources to manufacturers.
Sadly, governments are already balking at these imperatives.—Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign-exchange news service from Dow Jones Newswires and The Wall Street Journal. His new book on the global financial system, "The Unfair Trade," was published in May. Write to Michael Casey at Michael.J.Casey@dowjones.com.