Sometimes the world economy seems like a giant spider web: Touch one part and the vibrations are felt throughout the structure. So it is that slowing demand for steel in China could have an impact on U.S. savings accounts.
This week, BHP Billiton, a major supplier of iron ore for Chinese steel production, warned that demand from China was beginning to plateau. You can connect this fact to U.S. savings accounts through these three things:
1. The growth expectations for the Chinese economy
News that China's demand for iron ore is levelling off raised concerns over whether China could sustain its robust growth rate. The Chinese government has lowered the target growth rate to 7.5 percent -- below the recent growth rate of 8.9 percent, but still a pretty hot pace of growth. However, managing an economy is not an exact science. It is possible that the Chinese government's attempt to ease growth a little will result in an overreaction toward slower growth.
2. China's role as a trading partner with the U.S.
People tend to focus on imports from China, but according to the U.S. Census Bureau, China has been the third largest consumer of U.S. exports so far in 2012 (behind only Canada and Mexico). So, slowing growth in China means less demand for some U.S. exports, creating a potential drag on economic growth.
3. The relationship between economic growth and savings accounts
Broadly speaking, economic growth generally creates conditions that lead to higher interest rates. This can be a function of higher demand for capital and/or higher inflation expectations.
The relationship between growth and interest rates in the U.S. is especially sensitive right now because the Federal Reserve has committed so heavily to low interest rates as a source of economic stimulus. Rates can't rise unless the economy strengthens, yet it remains to be seen whether economic growth could survive a rise in rates.
Foreign trade could be the X factor in this delicate relationship. Strengthening foreign demand could give growth the momentum it needs to withstand rising interest rates. On the other hand, weakening foreign demand could make the economy even more dependent on low interest rates, thus dimming hopes for higher rates on savings accounts anytime soon. This is the connection between this week's news from China and U.S. savings accounts.
Of course, besides being inter-connected, the global economy is like a spider's web in that it is easy to get caught up in it. U.S savers should know this well -- it seems CD, savings, and money market rates have been stuck in a sort of web for years now.
The original article can be found at Money-Rates.com:What Chinese steel means to US savers