The Americas

Old order, new oil

Cuba’s future will become a little clearer

Or perhaps not...

The world will have several reasons to take notice of Cuba in 2009. The year will begin with the commemoration of the 50th anniversary of Fidel Castro’s revolution on January 2nd. The man himself, mentally alert but physically frail since abdominal surgery in 2006, may not make a public appearance. But there will be much official self-congratulation at the revolution’s survival in the face of an American trade embargo, CIA assassination attempts and the collapse of its former Soviet ally and patron.

For the long-suffering Cuban people there will be little to celebrate. Their privations have been increased by the devastation of housing and agriculture wrought by twin hurricanes in September 2008. This will make it difficult for Raúl Castro, who formally succeeded his brother as president in early 2008, to fulfil promises of higher wages. He is likely to accelerate steps to decentralise economic decision-making to state companies and co-operatives, and to lease idle state land to private farmers. Hurricane damage will also make Cuba even more dependent on aid from Venezuela’s President Hugo Chávez.

Two other developments in 2009 should make the island’s medium-term future a bit clearer. The first is a new American president. A change in the White House brings with it at least a chance that the United States will loosen its economic embargo and encourage some sort of political dialogue with the Cuban regime, rather than leave United States policy frozen in futility.

A second big question is oil. During 2009 a group of foreign oil companies will bring a drilling rig to the Cuban waters of the Gulf of Mexico to sink several exploratory wells. If they find oil, that will strengthen Mr Castro’s position—and also reduce his dependence on Mr Chávez.

The year will end with a long-postponed congress of the ruling Communist Party. This will provide important pointers to a Cuba without the direction of the Castro brothers.

Raúl Castro has surrounded himself with veteran leaders, many of whom have been in power for decades. His government has a transitional flavour to it. The party congress, the first since 1997, may see the emergence of a much younger and more pragmatic leadership. Even so, change in Cuba will proceed slowly—at least while Fidel Castro remains alive.

United States

The bucks stop here

By Leo Abruzzese, NEW YORK

What happens when Americans start to save

Visit any American electronics retailer and it is hard to miss the gawkers crowded round the flat-panel televisions. Sales of these pricey toys climbed more than 50% in the first half of 2008—just as the American economy was shedding nearly 500,000 jobs. Another sign of the ever-resilient American consumer? Perhaps, but it could be one of the last. After decades of relentless spending, American wallets may snap shut in 2009. If they do, many of the world’s merchants, from Chinese toymakers to Caribbean garment stitchers, will feel the pain.

China may now be a force in the global economy, but American households remain an even stronger one. Consumers in the European Union spend about as much as those in the United States, but Americans are more reliable: personal spending has risen every year for almost three decades and will top $10 trillion in 2009. Indeed, American consumer spending has not contracted for even a single quarter since 1991. But with mortgage delinquencies surging and the unemployment rate headed towards 7%, American consumers may have little choice but to start saving. That will mean less spending on computers from Taiwan and mobile phones from Finland.

Americans once saved as reliably as they now spend. In the 1980s American households salted away 9% of their income; this fell to around 5% in the 1990s and to barely 2% in the early years of this decade. Since the start of 2005, Americans have saved a mere 0.5% of what they earn. This may be changing. The saving rate jumped to 5% in May and averaged 2.4% in the following two months. The government stimulus cheques sent out during those months probably had something to do with this, as some of that windfall was saved. But this raises a question: what if Americans again started saving 5% of what they earn? What would it mean for America, and the world?

The answer, in a word, is recession, and probably a deep one. If the saving rate in 2009 rose to 5% from 0.5%, consumer spending would fall by about $500 billion a year. That is equal to around one-eighth of China’s economy, and nearly five times the amount of the American government’s stimulus payments. Industries that cater to discretionary purchases—clothing, furnishings, restaurants and, yes, flashy new televisions—would take the biggest blow. Most electronics sold in America come from Asia, so the effects would be particularly severe there.

How likely is this to happen? The saving rate rarely moves more than a couple of percentage points in a year, so a sudden pullback to 5% would be extraordinary. But these are extraordinary times: the worst housing crash since the Great Depression, an epic financial crisis, still-high energy prices. Household balance sheets in America are so stretched that a rise in the saving rate seems inevitable. Household debt is equal to 100% of GDP, twice what it was in 1980. Monthly debt payments as a share of income are around 14%, close to a record. And wages, adjusted for inflation, have been falling for the past year. Surely the American consumer, after a decade of splurging on over-priced homes, over-sized cars and over-engineered electronics, will take a breath.

However long it takes, a return to a 5% saving rate is hardly improbable. Households in the euro zone save 9% of their income on average. Americans do need to start saving more in order to boost investment and productivity. But if it happens too quickly, America, and the world, are in for a shock.