Who is driving reflation:China is out;it is all up to the US

As China gradually curbs reflation that it sent pulsing through the globaleconomy over the last twelve months and attempts to slow down build up ofdomestic anomalies (principally in real estate), the question is whether thereis anybody else that is able to step-in and support global growth and reflation?

While Eurozone’s outlook also brightened, we view it primarily as subtractingfrom rather than enhancing global demand. Germany converted the rest ofEurozone into a pale version of itself. Almost every Eurozone economy(including Italy, Spain & Portugal) is now generating surpluses. Instead ofcontributing to global demand, Eurozone is sucking in demand to support itsdomestic employment and avoid adjustments, with its private sectorcontinuing to save ~5% while current account surplus is ~3.5% of GDP (8%for Germany). It is also unlikely that Japan would make much difference, withprivate sector saving ~6% and CA surplus of ~ 4% of GDP. Both economiesmaximized returns from China-led stimulus, while contributing little in return.

Given that most economies are now running surpluses (from China & Japanto Germany, Italy & Spain), where are the deficits? The answer is: AngloSaxons, mostly US and UK. However, the challenge is that even if we addCanada & Australia and previously deficit nations that have now turned tosurpluses (Spain, Greece, Italy & Portugal), the high spending DM demand isdown from US$1.2trillion in ‘06to ~US$700bn now. Given that globaleconomy a decade ago was ~US$60trillion and it is closer to US$80trilliontoday, this is significant demand erosion. There are now far fewer countrieswilling and/or able to run deficits, and there is only one that not only still runssignificant deficits but also prints global currency, i.e. the US.