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Gitten's on the economic troubles « Previous | |Next »
January 30, 2008

Ross Gittens argues in the Sydney Morning Herald that it's not at all clear that, if the US drops into recession this year, it will drag us down with it. He says that though it's true that globalisation has made us more susceptible to developments in the rest of the world, but that's truer of developments in Asia than in the US and Europe. He acknowledges that:

The US is still the biggest economy in the world. If it goes into recession and so cuts back its imports, that does have a dampening effect on the countries that trade with it, including us. But the old saying that if America sneezes we catch a cold is simply wrong. It didn't hold in 2001 and won't hold now.That's because such a high proportion of our exports now go to Asia, particularly China and increasingly to India. The rapid development of these "emerging economies" gives them a momentum all their own.

However, isn't China's economic growth very export orientated? Won't a recession in the US lessen the demand for Chinese exports? Won't reduced growth mean less Chinese demand for our minerals?

Gittens tackles this argument head on.

It's true that a quarter or more of China's exports go to the US. But much of any decline in China's exports is likely to be offset by increased domestic consumption and, more particularly, increased investment in factories, housing and public infrastructure. Whichever way the Chinese jump, they'll require our coal and iron ore.

The real problem for Australia, says Gittens is the booming economy and inflation. That is why the Reserve Bank is trying to engineer a slowdown in the economy that would probably involve a slight worsening in unemployment. This is true. The looming US recession is not going to curb inflation in Australia in the near future. But these inflationary pressures are being overlaid by changes in the global market in which Australia does business.

Gittens is agreeing with Swan and Rudd that the booming Chinese economy will insulate Australia from the worst of the global financial meltdown. China's export strength should carry Australia's economic growth. We are the Lucky Country. However, things are changing. The Chinese, for instance can see an economic slowdown in China being caused by the problems in the US. It is in the long term interest of China and perhaps the global economy for China to begin absorbing its own products.

However, Gittens is also assuming that the Chinese can "decouple" from the US hard landing. Can they? To what extent? Steven Roach says says that the decouple assumption is questionable:

There's no region of the world that is more externally driven than developing Asia, which is where I live now. Exports represent 42 to 43 percent of pan-regional GDP, a record high. Private consumption represents 48 percent, a record low. So how is this region going to decouple? Advocates of decoupling would point to all the young consumers in China and India. But consider that the U.S. consumer last year spent $9.5 trillion. Chinese consumers spent about $1 trillion, and Indians about $650 billion. The power of the American consumer is still six times that of this new "Chindian" consumer. It's mathematically impossible to see a major decrease in U.S. consumption being made up by the Chinese and Indians. And there will be a meaningful decrease in U.S. consumer spending.

And Brad Sester says that the recent surge in Chinese growth hasn't come from a surge in domestic demand since domestic demand is actually weaker than it was in 2003 and 2004. Rather it stems from a bigger contribution from net exports.he adds:
Asia has been a huge source of demand for commodities. But when it comes to manufactured goods, Asian demand hasn't kept pace with Asian supply. That implies ongoing growth in Asia's surplus with the US and, now perhaps even more so, in Asia's surplus with Europe. China has decoupled to a degree from the US over the past two years. The US hasn't been the engine of demand growth globally over the past two years.... Europe, by contrast, has emerged as an engine of demand -- growing more rapidly than the US. That has meant that China has shifted from relying on US demand to relying on European demand. Up until now, China has offset the slowdown in the pace of growth in its exports to the US with strong growth in its exports to other parts of the world.

So the question is: to what extent will the E.U. be hit should the recession in the U.S. be mild to severe?

| Posted by Gary Sauer-Thompson at 5:29 AM |