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chilly economic winds « Previous | |Next »
December 3, 2008

Another interest rate cut by the Reserve Bank. Another sign that the economic storm clouds are brewing offshore as the optimists pen their op-eds on growth and bargains galore on the local share market. The Liberal opposition has yet to adopt a new talking point: fairness is a luxury for countries in decline.

Xmas2008.jpg Alan Moir

Everybody is slashing interest rates these days. Chinese exports are declining as is it's manufacturing output. So much for the optimist's myth that China can decouple itself from the US economy, thanks to a strengthened domestic economy. Asia's export-driven economies are being battered by the chilly winds of faltering demand in the US and Europe. (Don't you just love the weather metaphors for economics?)

The global economy is already headed toward a recession. A hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America and in Australia, since Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters.

The World Bank’s latest China Quarterly Update says that China really is a manufacturing and investment driven economy and that China ultimately has to produce for Chinese demand not world demand. However, wages have fallen from around 50% of China’s GDP at the start of the decade to around 40% of GDP and so consumption is a low share of GDP.

As Nouriel Roubini pointed out in Forbes several months ago:

For the last few years, the global economy has been running on two engines: the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort, spending more than its income and running large current account deficits, while China has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.

If the US engine of growth has effectively shut down, then the Chinese engine of growth has stalled. An aggressive easing of monetary and credit policy will not prevent a hard landing since monetary and credit-policy easing may be ineffective given the overinvestment of the last few years has led to a glut of capital goods.

Could fiscal policy rescue the day? The Chinese government has massive infrastructure projects for the next five to 10 years; but front-loading most of that multi-year spending over the next 12 to 18 months will be close to impossible.


| Posted by Gary Sauer-Thompson at 6:49 AM | | Comments (5)
Comments

Comments

I read somewhere that the Chinese government is expanding subsidies for farmers purchases of home appliances and mobile phones in order to boost sales. Its an attempt to arrest the decline in economic growth.

Peter
Roubini says that the risk of a hard landing in China is sharply rising.

A deceleration in the Chinese growth rate to 7% in 2009--just a notch above a 6% hard landing--is highly likely, and an even worse outcome cannot be ruled out at this point.

The National Accounts show that Australia's economy slowed sharply in the September quarter. Gross domestic product grew by 0.1%, seasonally adjusted, in the three months to September.

The Rudd Government is talking things up. According to Wayne Swan the world is throwing everything bad at us and Australia can still keep growing. Growth will return with a bang next year because the Government has taken decisive action to put lots of money in our pocket. Our confidence as consumers has returned. So we will spend spend spend. Max the credit cards. Another bubble is on the way.

There is a concerted public campaign for us consumers to spend our money over Xmas---it doesn't matter about our debts (few have them apparently) or fear of losing our jobs----we have to spend to keep the economy ticking over.