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Joseph Quinlan, a managing director and the chief market strategist of Bank of America, Global Wealth and Investment Management, joined the firm in June 2003. Quinlan is a leading expert on global capital flows and the transatlantic economy. He has been a senior transatlantic fellow (nonresident) at The German Marshall Fund in Brussels, Belgium, since 2003. His research there centers on regional and global trade and investment flows. As a fellow, he regularly briefs congressional leaders on global economic/financial affairs and has testified before the European Parliament.Not long ago, a factory worker in developing Asia trudged to work on Saturday morning; a day's labor didn't buy much for consumers in Latin America because of rampant inflation; rock-bottom oil prices meant soaring unemployment and weak consumer spending in the Middle East; and geopolitics left workers and consumers in developing Europe out in the cold, cut off from Western goods.
Fast-forward to today and it's a radically different picture. Most workers in Asia now go to the mall on Saturday, not the factory. The purchasing power of Latin America has increased sharply, leading to a steep decline in inflation and rising commodity prices. Soaring oil prices have left the Middle East awash in petrodollars. And unshackled from communism, consumers in central Europe have been busy playing catch-up when it comes to indulging in Western goods and amenities.
All of the above invalidates the well-worn assumption that the global economy rests squarely on the shoulders of the U.S. consumer. True, U.S. consumer spending remains important to the health of the global economy, and the U.S. is still the world's top importer. But the United States is not the omnipotent force it once was.
The baton of global consumption is being passed from the developed nations in general, and the United States in particular, to the developing nations. To this point, America's share of global imports dropped to 14.3% of the total in December 2006, the last month of available data, which comes courtesy of the International Monetary Fund's Direction of Trade Statistics. The figures for December 2006 mark the lowest monthly share since December 1995 and stand in contrast to August 2000, when the U.S. share of world imports peaked at just over 20%. Back then, the United States was the world's market of first and last resort, and any sudden downturn in U.S. imports would have rippled across the world.
But when America's share of total global imports dropped from 16.5% in January 2006 to 14.3% in December, the global economy hardly missed a beat. Why? Because the penchant to consume is going global. Consumption is no longer the domain just of the U.S. -- going to the mall on Saturday afternoon is just as popular in Bangkok, Thailand, and São Paulo, Brazil, as it is in Boston and San Antonio. Against this backdrop, total imports of the developing nations rose 20.6% in 2006 from the prior year, well ahead of import growth in the U.S. (11%), the European Union (13.8%), Japan (12.6%) and the developed nations as a whole (12.5%).
The chart below puts the rebalancing of global import demand into perspective beyond a one-year time frame. Note that since the start of this decade, the developing nations' share of global imports has increased by over six percentage points. Not surprisingly, developing Asia, led by China, accounts for nearly half of the gains; yet take notice of the jump in central Europe's share of world imports. Quietly and without much fanfare, the rapidly growing former Soviet-bloc nations that make up most of central Europe have emerged as a key source of global import demand -- indeed, no other region of the world has experienced stronger import growth this decade than developing Europe, with imports soaring nearly 200% between 2000 and 2006.
The bottom line: a powerful, positive force for growth and earnings.
That the world pivots around the U.S. consumer is an outdated, misguided and U.S.-centric view of the world. Times have changed. Thanks to a variety of factors -- rising per capita incomes, budding middle classes, abundant savings, stronger employment growth, higher private capital investment -- the developing nations are becoming a much more powerful force when it comes to global imports. In other words, China, Brazil, Poland and others are not only a source of global supply -- they are also a critical source of global demand.
We count the secular rebalancing of global import demand as among the most powerful global forces of today. This trend implies a healthier global economy and, by extension, is overwhelmingly bullish for U.S. multinationals and many large-cap U.S. stocks.
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